What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-11-15 compared with 2020-11-16 · 276 added, 247 removed, 410 unchanged (56% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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.

DESCRIPTION OF THE COMPANY

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For further description of the business, refer to Part I, Item 1, Business.

We continue to monitor and respond to the evolving nature of COVID-19 and its impact to our global business.

We formed an internal COVID-19 task force for the primary purposes of maintaining the health and safety of our team members, ensuring our ability to operate our processing facilities and maintaining the liquidity of our business.

We continue to monitor and respond to the evolving nature of the COVID-19 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 fiscal 2021.

We have experienced and continue to experience multiple challenges related to the pandemic.

These challenges increased our operating costs and negatively impacted our sales volumes for the back half of fiscal 2020 and are anticipated to continue into fiscal 2021.

These challenges increased our operating costs during fiscal 2020 and fiscal 2021.

Operationally, we experienced slowdowns and temporary idling of production facilities due to team member absenteeism and choices we made to ensure team member health and safety.

As a result, we have experienced lower levels of productivity and higher costs of production.

This will likely continue in the short term until the effects of COVID-19 diminish.

Each of our segments has also experienced a shift in demand from foodservice to retail during 2020;

however, the volume increases in retail have not been sufficient to offset the decreases in foodservice.

These current trends, including the combination of operational challenges and volume impacts, will likely continue into fiscal 2021 and have a negative impact on overall earnings.

The ultimate impact of COVID-19 remains uncertain and will depend on future developments, including the duration and spread of the pandemic and related actions taken by federal, state and local government officials to prevent and manage disease spread, all of which are uncertain and cannot be predicted.

Team Members – The health and safety of our team members is our top priority.

To protect our team members, we have implemented and will continue to implement safety measures recommended by the Centers for Disease Control and Prevention ("CDC") and the Occupational Safety and Health Administration ("OSHA") in our facilities and coordinate with other health officials as appropriate, including, but not limited to, checking the temperature of team members as they enter company facilities, restricting visitor access, increasing efforts to deep clean and sanitize facilities, requiring the use of protective face coverings and making protective face coverings and other protective equipment available to team members and encouraging team members who feel sick to stay at home through relaxed attendance policies and enhanced benefits.

We implemented additional ways to promote social distancing in our production facilities by creating additional breakroom space and allowing extra time between shifts to reduce interaction of team members, as well as erecting dividers between workstations or increasing the space between workers on the production floor.

For office-based team members, we have encouraged team members capable of working from home to do so, and are prioritizing team member safety as we begin to reintegrate into our offices over time.

We paid $1,000 bonuses to approximately 106,000 domestic frontline team members who support the Company’s operations during the pandemic.

Additionally, we experienced positive COVID-19 cases and worker absenteeism throughout our production network during the back half of fiscal 2020, which led to some temporary idling of production facilities.

We are currently compensating our team members for sick time and COVID-19 related idling or shift cancellations.

Customers and Production – Our most significant impacts from COVID-19 relate to channel shifts and lower production.

Each of our segments experienced a shift in demand from foodservice to retail during 2020 and have seen varying levels of foodservice recovery and the return of volumes during 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, all of which are uncertain and cannot be predicted.

Additionally, we continue to assess the potential of more permanent impacts to our businesses.

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 nurse and administrative support staff positions and developed an “always-on” testing strategy rooted in contact tracing.

In August 2021, we announced all domestic team members were required to be fully vaccinated by November 1, 2021.

Customers and Production

Our most significant impacts from COVID-19 relate to channel shifts and lower production.

We are committed to doing our best to ensure the continuity of our business and the availability of our products to customers.

We have seen a shift in demand from our foodservice to our retail sales channels as schools and in-dining restaurants remain closed or continue to operate at reduced capacity across the country.

Our production capabilities, including our large scale and geographic proximities, allow us to adapt some of our facilities to the changing demand by shifting certain amounts of production from foodservice to retail.

Not all of our facilities can be adapted and as a result we experienced a net negative impact to our volumes.

In addition, our production facilities experienced varying levels of production impacts, including reduced volumes, due to the implementation of additional worker health precautions, worker absenteeism and temporary COVID-19 related idling at some of our production facilities.

Additionally, we temporarily idled certain facilities, shifts, and/ or lines that service the foodservice channel as we balanced the shifting demand between foodservice and retail sales channels.

On April 28, 2020, the President issued an Executive Order stating the importance of the continued operation of meat and poultry processing facilities and directing the Secretary of Agriculture to issue rules and orders to ensure the continued supply of meat and poultry, consistent with the guidance for the operations of meat and poultry processing facilities jointly issued by the CDC and OSHA.

This order provides clarity on what standards should apply at our meat and poultry processing facilities and we anticipate continuing to work with the United States Department of Agriculture ("USDA") and other government officials in our efforts to ensure that we are able to operate our facilities safely.

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.

Our production capabilities, including our large scale and geographic proximities, allow us to adapt some of our facilities to the changing demand.

Our supply chain has stayed largely intact as we have built contingency plans for redundant supply for our production facilities as well as our external suppliers.

We have been able to leverage our extensive distribution network and large private transportation fleet to help mitigate the impacts of COVID-19.

We have experienced and expect to continue to experience volatility in commodity inputs, which has impacted our input costs, in part due to impacts caused by COVID-19.

Production facility downtime in the back half of fiscal 2020 impacted all our segments' supply chains.

Our Prepared Foods segment depends on adequate supplies of raw materials necessary for its production.

High levels of industry pork facility idling during the back half of fiscal 2020 impacted the availability of certain raw materials which temporarily limited production capability and increased formulation costs of various Prepared Foods products.

Additionally, our Chicken segment had to divert some of its live production to rendering and suboptimal product mixes, while our Beef and Pork segments had to delay deliveries of live cattle and hogs and also dealt with the impact of heavier harvest weights.

Since we also export globally, container availability and port capacities have been among the challenges in meeting the global demand for our products.

Insurance and CARES Act – Although we maintain insurance policies for various risks, we do not believe most COVID-19 impacts will be covered by our policies.

On March 27, 2020, the President signed into law the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”).

The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferral of the employer portion of social security payments, and a number of income tax provisions.

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.

We began implementing the deferral of the employer portion of social security payments in the back half of the fiscal year, which had a favorable impact on liquidity.

This resulted in the deferral of approximately $185 million of payroll taxes in fiscal 2020.

We recognized a benefit of approximately $30 million related to the refundable payroll tax credit provision.

Liquidity – We generated approximately $3.9 billion of operating cash flows during fiscal 2020 .

At October 3, 2020 , we had $3.2 billion of liquidity, which included availability under our revolving credit facility and $1,420 million of cash and cash equivalents.

We have $548 million of current debt.

Combined with the cash expected to be generated from the Company’s operations, we anticipate that we will maintain sufficient liquidity to operate our business, make capital expenditures, pay dividends and address other needs including our ability to meet maturing debt obligations.

However, we will continue to monitor the impact of COVID-19 on our liquidity and, if necessary, take action to preserve liquidity and ensure that our business can operate during these uncertain times.

This may include temporarily suspending share repurchases, suspending or reducing dividend payments or other cash preservation actions as necessary.

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.

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 due to our production facilities experiencing varying levels of absenteeism and due to labor shortages associated with the economic impact of the pandemic.

We will continue to operate our production facilities with team member health and safety as a top priority.

The COVID-19-related slowdowns and temporary idling drive higher labor and production costs, which we expect to continue until the return of more normal conditions.

However, some of the higher labor and other costs may become more permanent in nature.

We also experienced COVID-19-related demand shifts away from foodservice and into retail, and we responded to the demand shifts by adjusting parts of our production capacity accordingly.

Despite adjusting parts of our operational footprint, higher retail volumes did not fully offset the reduced volumes in foodservice.

Additionally, the price and mix of these volume shifts resulted in lower margin realization for portions of the year in our Prepared Foods and Chicken segments.

Further, idling of pork facilities could have downstream impacts on the availability of raw material for parts of our Prepared Foods business, which could subsequently impact its ability to produce at normal levels.

Consequently, the challenges created by absenteeism and our proactive, temporary idling of production facilities due to COVID-19, adversely affects our operating costs and reduces what would otherwise be a stronger margin environment.

However, we cannot predict the ultimate impact that COVID-19 will have on our short- and long-term demand at this time, as it will depend on, among other things, the severity and duration of the COVID-19 pandemic.

Our liquidity is expected to be adequate to continue to run our operations and meet our obligations as they become due.

Our accounting cycle resulted in a 53-week year for fiscal 2020 and a 52-week year for fiscal 2019 and 2018.

Sales grew 2% in fiscal 2020 over fiscal 2019 to $43.2 billion, primarily due to the impact of the additional week and increased average sales prices in the Beef, Pork and Prepared Foods segments.

Fiscal 2020 operating income increased compared to fiscal 2019 , as strong Beef and Pork segment results were partially offset by a decline in operating income in the Chicken and Prepared Foods segments.

We generated $3.8 billion of operating cash flows during fiscal 2021.

At October 2, 2021, we had $4.8 billion of liquidity, which included availability under our revolving credit facility and $2.5 billion of cash and cash equivalents.

We have $1.1 billion of current debt.

Our accounting cycle resulted in a 52-week year for both fiscal 2021 and 2019 and a 53-week year for fiscal 2020.

Sales grew 9% in fiscal 2021 over fiscal 2020 to $47.0 billion, primarily due to increased average sales prices in each of our segments, partially offset by the impact of an additional week in fiscal 2020.

Fiscal 2021 operating income increased compared to fiscal 2020, as strong Beef results and the gain on the sale of our pet treats business were partially offset by a decline in operating income in the Chicken and Pork segments.

In fiscal 2021, our results were impacted by $626 million of charges related to legal contingency accruals, $27 million of charges related to the relocation of a production facility in China, $17 million of production facilities fire costs, net of insurance proceeds and a $784 million gain on the sale of our pet treats business.

In fiscal 2020, our results were impacted by $77 million of restructuring and related charges offset by the positive impact of the additional week.

In fiscal 2019, our results were impacted by a $41 million impairment associated with the planned divestiture of a business, $41 million of restructuring and related charges, $37 million related to Keystone Foods purchase accounting and acquisition related costs and $31 million of costs associated with a fire at one of our beef production facilities.

During fiscal 2021, we incurred direct incremental expenses related to COVID-19 totaling approximately $335 million, which were recorded in Cost of Sales in our Consolidated Statements of Income.

During fiscal 2020, we incurred direct incremental expenses related to COVID-19 totaling approximately $540 million, of which approximately $500 million and $40 million were recorded in Cost of Sales and Selling, General and Administrative, respectively, in our Consolidated Statements of Income.

These COVID-19 direct incremental expenses primarily included team member costs associated with worker health and availability and production facility downtime, including direct costs for personal protection equipment, production facility sanitization, COVID-19 testing, donations, product downgrades, rendered product, certain professional fees and $114 million of thank you bonuses to frontline team members, which was partially offset by the CARES Act credits.

These COVID-19 direct incremental expenses in fiscal 2020 and fiscal 2021 primarily included team member costs associated with worker health and availability and production facility downtime, including direct costs for personal protection equipment, production facility sanitization, COVID-19 testing and vaccinations, donations, product downgrades, rendered product, certain professional fees and $114 million of thank you bonuses to frontline team members in fiscal 2020, which was partially offset by the CARES Act credits.

Due to the nature of these direct incremental COVID-19 expenses, our segments were primarily impacted based on their relative number of team members, absenteeism and the degree of production disruptions they have experienced, and thus, our Beef and Chicken segments incurred a greater proportion of the total costs.

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Market Environment

According to the USDA, domestic protein production (beef, pork, chicken and turkey) increased approximately 2% in fiscal 2020 compared to fiscal 2019 .

We continue to monitor recent trade and tariff activity as well as COVID-19 and its potential impacts to exports and input costs across all of our segments.

According to the USDA, domestic protein production (beef, pork, chicken and turkey) was relatively flat in fiscal 2021 compared to fiscal 2020.

We continue to monitor trade and tariff activity as well as COVID-19 and its potential impacts to exports and input costs across all of our segments.

Additionally, all segments experienced increased operating costs in fiscal 2021.

We will pursue recovery of these increased costs through pricing.

The Beef and Pork segments experienced strong demand but had lower production throughput associated with the impacts of COVID-19 and also experienced lower livestock costs.

The Chicken segment experienced volatile market conditions associated with increased domestic availability of supply and lower production throughput associated with COVID-19.

The Prepared Foods segment continued to experience growth in the retail channel but faced increased raw material costs and lower production throughput associated with COVID-19.

Margins – Our total operating margin was 7.2% in fiscal 2020 .

The Beef segment experienced strong global demand and ample supply of market-ready cattle.

The Pork segment experienced strong demand and lower hog supplies.

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 fiscal 2021.

Our total operating margin was 9.3% in fiscal 2021.

Operating margins by segment were as follows:

• Beef – 18.0%

• Pork – 5.2%

• Chicken – (4.6)%

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We intend to achieve our strategy as we:

grow our business through differentiated capabilities;

deliver ongoing financial fitness through continuous improvement;

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.

During fiscal 2019, we acquired two businesses for a total of approximately $2.5 billion, net of cash acquired.

These businesses included the Thai and European operations, which consist of vertically integrated chicken and further-processing operations, and Keystone Foods, a major supplier to the growing global foodservice industry.

They were acquired in furtherance of our growth strategy and expansion of our value-added protein capabilities in domestic and global markets.

For further description refer to Part II, Item 8, Notes to the Consolidated Financial Statements, Note 3:

Acquisitions and Dispositions.

In the first quarter of fiscal 2020, the Company approved a restructuring program (the "2020 Program"), which is expected to contribute to the Company’s overall strategy of financial fitness through the elimination of overhead and consolidation of certain enterprise functions.

In the fourth quarter of fiscal 2020, the Company extended the 2020 Program as it identified additional opportunities to eliminate overhead by optimizing organizational structures and other activities.

As a result of this restructuring program, we expect to realize savings of approximately $140 million and $160 million in fiscal 2021 and fiscal 2022, respectively.

We have recognized $60 million of cumulative pretax charges in fiscal 2020 associated with the 2020 Program consisting of severance and employee related costs.

As part of the 2020 Program, we are eliminating positions across several areas and job levels, with eliminated positions originating from the corporate offices in Springdale, Arkansas and Chicago, Illinois, as well as certain production facility and supply chain administrative positions.

The majority of the positions have already been or are expected to be eliminated by the end of fiscal 2021.

For further description refer to Part II, Item 8, Notes to the Consolidated Financial Statements, Note 7:

Restructuring and Related Charges.

• 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 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 on July 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.

• Beginning in fiscal 2022, we are launching 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 are targeting $1 billion in productivity savings by fiscal 2024, relative to a fiscal 2021 cost baseline.

The execution of this program will be supported by a program management office that will ensure delivery of key project milestones and report 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.

At this time, we do not anticipate costs associated with this program to be material.

in millions, except per share data

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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.

2020 – Included the following items:

• $75 million pretax, or ($0.16) per diluted share, of restructuring and related charges.

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• $116 million pretax, or $0.24 per diluted share, due to gain from pension plan terminations.

2019 – Included the following items:

$37 million pretax, or ($0.08) per diluted share, of Keystone Foods purchase accounting and acquisition related costs, which included an $11 million purchase accounting adjustment for the amortization of the fair value step-up of inventory and $26 million of acquisition related costs.

$41 million pretax, or ($0.08) per diluted share, of restructuring and related charges.

$55 million pretax, or $0.11 per diluted share, from gain on sale of an investment.

$105 million post tax, or $0.29 per diluted share, from recognition of previously unrecognized tax benefit.

$31 million pretax, or ($0.06) per diluted share, of Beef production facility fire costs.

$41 million pretax, or ($0.09) per diluted share, from an impairment associated with the planned divestiture of a business.

$15 million pretax, or ($0.03) per diluted share, due to a pension plan termination charge.

SUMMARY OF RESULTS

Sales in millions

2021 2020 2019

Sales $ 47,049 $ 43,185 $ 42,405

Change in sales volume (2.8) % 0.7 %

Change in average sales price 13.0 % 1.1 %

Sales growth 8.9 % 1.8 %

• 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 $545 million reduction of Sales from the recognition of legal contingency accruals.

• Sales Volume – Sales were positively impacted by an increase in sales volume, which accounted for an increase of $278 million primarily due to incremental volumes from business acquisitions as well as the impact of an additional week in fiscal 2020, partially offset by decreased volumes in each of our segments in fiscal 2020 due to lower production throughput associated with the impact of COVID-19.

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The increase in average sales price was primarily attributable to favorable product mix related to robust demand in the retail channel across all of our segments and beef and pork demand remaining strong amid supply disruptions related to COVID-19, partially offset by approximately $45 million of incremental discounted sales in the Prepared Foods segment.

Sales Volume – Sales were positively impacted by an increase in sales volume, which accounted for an increase of $3,539 million primarily driven by incremental volumes from business acquisitions which impacted the Chicken segment and International/Other, partially offset by business divestitures in fiscal 2018 in our Prepared Foods segment.

Average Sales Price – Sales were negatively impacted by lower average sales prices, which accounted for a decrease of $1,186 million.

The Chicken segment had a decrease in average sales price as a result of decreased pricing associated with product mix changes from fiscal 2018 acquisitions, partially offset by an increase in average sales price in the Beef and Prepared Foods segments attributable to strong demand and sales in the Beef segment and a more favorable product mix and higher raw material costs in our Prepared Foods segment.

The above amounts include a net increase of $2,209 million related to the impact of results from acquisitions and divestitures.

Cost of Sales

Cost of Sales in millions

2021 2020 2019

Cost of sales $ 40,523 $ 37,801 $ 37,383

Gross profit 6,526 5,384

Cost of sales as a percentage of sales 86.1 % 87.5 %

• 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 $3,763 million impact of higher input cost per pound was impacted by:

• Increase in live hog costs of approximately $980 million in our Pork segment.

• Increase of approximately $945 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 $520 million in our Prepared Foods segment.

• Increase in freight and transportation costs of approximately $315 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 $160 million in our Beef segment.

• Decrease due to the recognition of a $784 million gain on the sale of our pet treats business.

• Decrease of $165 million due to reduction in direct incremental expenses related to COVID-19, primarily related to the payment of $114 million in thank you bonuses during fiscal 2020.

• 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 $1,041 million impact of lower sales volume was primarily driven by decreased volume in each of our segments in fiscal 2021 due to lower production throughput associated with the impact of COVID-19 and a challenging labor environment as well as the impact of an additional week in fiscal 2020.

• Cost of sales increased $418 million.

This included a net increase of $667 million primarily related to the impact of results from acquisitions and divestitures.

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• The $642 million impact of lower sales volume, excluding the impact of acquisitions, was primarily driven by decreased sales volume in each of our segments due to lower production throughput associated with the impact of COVID-19 in the back half of fiscal 2020 as well as a reduction in live cattle processing capacity from the temporary closure of a production facility in the first quarter of fiscal 2020 as a result of a fire, partially offset by the impact of the additional week in fiscal 2020.

Cost of sales increased $2,427 million.

This included a net increase of $2,120 million primarily related to the impact of results from acquisitions and divestitures.

For the remaining $307 million increase, higher input cost per pound increased cost of sales $445 million, offset by lower sales volume, which decreased cost of sales $138 million.

The $445 million impact of higher input cost per pound was impacted by:

Increase in live cattle costs of approximately $110 million in our Beef segment.

Increase in live hog costs of approximately $100 million in our Pork segment.

Increase in raw material and other input costs of approximately $60 million in our Prepared Foods segment.

Increase in freight costs of approximately $20 million.

Increase due to $31 million of incremental costs associated with a fire at one of our Beef production facilities.

Decrease due to one-time cash bonus to front line team members of $108 million in fiscal 2018.

Decrease due to impairment charges of $101 million associated with the divestiture of a non-protein business in fiscal 2018, partially offset by a $41 million impairment related to the planned divestiture of a business in fiscal 2019 and a $33 million gain related to a sale of a non-protein business in fiscal 2018.

Decrease due to net derivative gains of $26 million for fiscal 2019, compared to net derivative losses of $33 million for fiscal 2018 due to our risk management activities.

These amounts exclude offsetting impacts from related physical purchase transactions, which are included in the change in live cattle and hog costs and raw material and feed ingredient costs described herein.

Remaining net change across all of our segments was primarily driven by increased operating costs and impacts on average input cost per pound from mix changes.

The $138 million impact of lower sales volume, excluding the impact of acquisitions and divestitures, was driven by a decrease in sales volume in our Chicken segment.

Selling, General and Administrative

Selling, General and Administrative in millions

2021 2020 2019

Selling, general and administrative $ 2,130 $ 2,376 $ 2,252

As a percentage of sales 4.5 % 5.5 %

• Decrease of $246 million in selling, general and administrative was primarily driven by:

• 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 ended October 2, 2021 as compared to a $106 million loss recognized in the fiscal year ended October 3, 2020.

• Decrease of $60 million from restructuring and related charges incurred in fiscal 2020.

• Decrease of $56 million in marketing, advertising and promotion expenses.

• Decrease of $27 million in donations.

• Decrease of $24 million in commission and brokerage fees.

• Decrease of $21 million in depreciation and amortization.

• Increase of $81 million in professional fees.

• Increase of $30 million in technology related costs.

• Increase of $124 million in selling, general and administrative was primarily driven by:

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• Increase of $56 million from fiscal 2019 acquisitions not owned by us for all of fiscal 2019.

• Increase of $49 million from the impact of a cattle supplier’s misappropriation of Company funds.

• Increase of $40 million from direct incremental expenses associated with COVID-19.

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• Decrease of $26 million in travel and entertainment expenses.

Increase of $131 million in selling, general and administrative was primarily driven by:

Increase of $87 million related to the Keystone Foods acquisition.

Increase of $26 million in team member costs primarily from incentive-based compensation.

Increase of $18 million from technology related costs.

Increase of $16 million in marketing, advertising, and promotion expenses.

Decrease of $18 million from restructuring and related charges.

Interest Expense

Interest Expense in millions

Cash interest expense $ 448 $ 497

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2021 / 2020 –

Cash interest expense primarily included interest expense related to our senior notes, term loans and commercial paper, in addition to commitment fees incurred on our revolving credit facility.

The increase in cash interest expense in fiscal 2020 was primarily due to debt issued in fiscal 2019 in connection with business acquisitions and higher interest rates, partially offset by term loans extinguished in fiscal 2020.

Non-cash interest expense primarily included interest capitalized, partially offset by the amortization of debt issuance costs and discounts/premiums on note issuances.

Other (Income) Expense, net

• 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, decrease in average amount outstanding under the term loans in fiscal 2021, redemption of the August 2021 Notes as well as the settlement of the 2020 notes during fiscal 2020.

Other (Income) Expense, net in millions

$ (65) $ (131)

2021 – Included $34 million from a defined benefit plan gain.

2020 – Included $116 million of gains related to pension plan terminations.

2019 – Included $55 million of pretax gain on the sale of an investment, $23 million of insurance proceeds and other income and $20 million of equity earnings in joint ventures, partially offset by $48 million of net periodic pension and postretirement benefit costs and pension plan settlements.

Effective Tax Rate

24.3 % 22.3 %

• Our effective income tax rate was 24.3% for fiscal 2021 compared to 22.3% for fiscal 2020.

State taxes increased the effective tax rate by 3.3% and 2.9% for fiscal 2021 and 2020, respectively.

The effective tax rate for fiscal 2019 includes a 6.6% benefit due to changes in tax reserves, primarily expirations of federal, state and foreign statutes of limitations.

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%, and the tax benefit from the foreign-derived intangible income deduction decreased the effective tax rate for fiscal 2021 by 1.1%.

SEGMENT RESULTS

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The following table is a summary of segment sales and operating income (loss), which is how we measure segment income (loss):

Operating Income (Loss)

Sales Operating Income (Loss)

2021 2020 2019 2021 2020 2019

Beef $ 17,999 $ 15,742 $ 15,828 $ 3,240 $ 1,580 $ 1,050

Pork 6,277 5,128 4,932 328 565 263

Chicken 13,733 13,234 13,300 (625) 122 621

Prepared Foods 8,853 8,532 8,418 1,456 743 843

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Intersegment Sales (1,803) (1,307) (1,362) — — —

Beef Segment Results

Total $ 47,049 $ 43,185 $ 42,405 $ 4,396 $ 3,008 $ 2,770

Beef Segment Results in millions

2021 2020 Change 2021 vs.

2020 2019 Change 2020 vs.

Sales $ 17,999 $ 15,742 $ 2,257 $ 15,828 $ (86)

Sales Volume Change 0.3 % (4.5) %

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Operating Margin 18.0 % 10.0 % 6.6 %

• 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.

• Sales Volume – Sales volume decreased primarily due to lower production throughput associated with the impact of COVID-19 during portions of fiscal 2020 and a reduction in live cattle harvest capacity as a result of a fire that caused the temporary closure of a production facility for the majority of the first quarter of fiscal 2020, partially offset by the impact of an additional week in fiscal 2020.

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• Operating Income – Operating income increased primarily due to market conditions, including COVID-19 disruptions, which increased the spread between preexisting contractual agreements and the cost of fed cattle, partially offset by price reductions offered to customers, as well as production inefficiencies and direct incremental expenses related to COVID-19.

Sales Volume – Sales volume decreased due to a reduction in live cattle processing capacity from the temporary closure of a production facility as a result of a fire.

Average Sales Price – Average sales price increased as demand for our beef products remained strong.

Operating Income – Operating income increased as we continued to maximize our revenues relative to live fed cattle costs, partially offset by increased operating costs and $31 million of net incremental costs from the production facility fire.

Pork Segment Results

Additionally, results were impacted by losses of $106 million and $57 million in fiscal years 2020 and 2019, respectively, from a cattle supplier's misappropriate of Company funds.

Pork Segment Results in millions

2021 2020 Change 2021 vs.

2020 2019 Change 2020 vs.

Sales $ 6,277 $ 5,128 $ 1,149 $ 4,932 $ 196

Sales Volume Change (2.7) % 1.8 %

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Operating Margin 5.2 % 11.0 % 5.3 %

• 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.

• Sales Volume – Sales volume increased primarily due to the impact of the additional week, partially offset by lower production throughput associated with COVID-19 during portions of fiscal 2020 despite strong demand for our pork products and increased domestic availability of live hogs.

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• Operating Income – Operating income increased primarily due to market conditions, including COVID-19 disruptions, which increased the spread between preexisting contractual agreements and the cost of live hogs, partially offset by production inefficiencies and direct incremental expenses related to COVID-19.

Sales Volume – Sales volume increased due to increased domestic availability of live hogs and strong demand for our pork products.

Average Sales Price – Average sales price increased associated with higher livestock costs.

Operating Income – Operating income decreased due to periods of compressed pork margins caused primarily by the combination of increased livestock supplies, excess domestic availability of pork and export constraints, which drove livestock costs up faster than sales prices.

Chicken Segment Results

Chicken Segment Results in millions

2021 2020 Change 2021 vs.

2020 2019 Change 2020 vs.

Sales $ 13,733 $ 13,234 $ 499 $ 13,300 $ (66)

Sales Volume Change (3.3) % 0.1 %

Average Sales Price Change 11.2 % (0.6) %

Operating Income

Operating Income (Loss) $ (625) $ 122 $ (747) $ 621 $ (499)

Operating Margin (4.6) % 0.9 % 4.7 %

• 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.

• Sales Volume – Sales volume was relatively flat in fiscal 2020 as the impact of the additional week and increased volumes in retail were offset by lower production throughput associated with the impact of COVID-19 and lower foodservice demand.

• Average Sales Price – Average sales price decreased in fiscal 2020 primarily due to weaker chicken pricing as a result of market conditions.

Operating Income – Operating income decreased in fiscal 2020 primarily from market conditions, unfavorable product mix, as well as production inefficiencies and direct incremental expenses related to COVID-19.

• Operating Income (Loss) – Operating income decreased in fiscal 2020 primarily from market conditions, unfavorable product mix, as well as production inefficiencies and direct incremental expenses related to COVID-19.

Operating income was also impacted by $34 million in restructuring costs incurred in fiscal 2020.

Sales Volume – Sales volume increased primarily due to incremental volume from business acquisitions.

Average Sales Price – Average sales price decreased due to market conditions and sales mix primarily associated with the acquisition of a poultry rendering and blending business in the fourth quarter of fiscal 2018.

Operating Income – Operating income decreased due to increased operating costs and challenging pricing conditions.

Additionally, operating income was impacted in fiscal 2019 by approximately $40 million of net feed ingredient costs and realized and mark-to-market derivative losses.

Prepared Foods Segment Results

Prepared Foods Segment Results in millions

2021 2020 Change 2021 vs.

2020 2019 Change 2020 vs.

Sales $ 8,853 $ 8,532 $ 321 $ 8,418 $ 114

Sales Volume Change (5.4) % (1.9) %

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Operating Margin 16.4 % 8.7 % 10.0 %

• 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.

• Sales Volume – Sales volume decreased as growth in volume across the retail channel was offset by a reduction in the foodservice channel related to reduced demand and lower production throughput due to the impact of COVID-19, partially offset by the impact of an additional week in fiscal 2020.

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Additionally, operating income was impacted by $28 million in restructuring costs.

Sales Volume – Sales volume decreased primarily from business divestitures.

Average Sales Price – Average sales price increased due to product mix, which was positively impacted by business divestitures, as well as pricing increases in our ongoing business from the pass through of raw material costs.

Operating Income – Operating income was relatively flat in fiscal 2019 compared to fiscal 2018 as strong demand for our products and improved product mix was offset by increased raw material and operating costs.

Additionally, operating income in fiscal 2019 was impacted by a $41 million impairment from a planned divestiture of a business.

Operating income in fiscal 2018 was impacted by a $68 million impairment, net of realized gains, associated with the divestiture of non-protein businesses.

International/Other Results

International/Other Results in millions

2021 2020 Change 2021 vs.

2020 2019 Change 2020 vs.

Sales $ 1,990 $ 1,856 $ 134 $ 1,289 $ 567

Operating Loss (3) (2) (1) (7) 5

• 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 in China, partially offset by improved results in our international operations in fiscal 2021.

• Sales – Sales increased primarily from the incremental sales from the the first full year of results from the acquisitions of Keystone Foods and the Thai and European operations.

• Operating Loss – Operating results improved due to lower third-party merger and integration costs partially offset by reduced profitability in our international operations primarily from the impacts of COVID-19.

Sales – Sales increased primarily from the incremental sales from the acquisitions of Keystone Foods and the Thai and European operations.

Operating loss – Operating loss decreased primarily from better performance in our China operations and inclusion of results of the Keystone Foods acquisition, partially offset by increased third-party merger and integration costs associated with the Keystone Foods acquisition.

LIQUIDITY AND CAPITAL RESOURCES

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and overall market conditions.

In addition, we will continue to monitor the impact of COVID-19 on our liquidity and, if necessary, take action to preserve liquidity and ensure that our business can operate during these uncertain times.

This may include temporarily suspending share repurchases, suspending or reducing dividend payments or taking other cash preservation actions as necessary.

Cash Flows from Operating Activities

Cash Flows from Operating Activities in millions

Net income $ 3,060 $ 2,071

Non-cash items in net income:

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Deferred income taxes (125) 18

Gain on dispositions of businesses

Gain on disposition of business (784) —

Impairment of assets 60 48

Stock-based compensation expense 91 89

Other, net (57) (124)

Net changes in operating assets and liabilities 381 580

Net cash provided by operating activities $ 3,840 $ 3,874

Impairment of assets in fiscal 2019 included a $41 million impairment related to the planned sale of a business.

Other, net in fiscal 2020 included a $112 million gain related to pension plan terminations.

• Gain on disposition of business related to the sale of our pet treats business.

For further description, refer to Part II, Item 8, Notes to the Consolidated Financial Statements, Note 3:

Acquisitions and Dispositions.

• Other, net included a $34 million defined benefit plan gain in fiscal 2021 and a $112 million gain related to pension plan terminations in fiscal 2020.

• Cash flows associated with changes in operating assets and liabilities:

2020 – Increased primarily due to decreased accounts receivable, increased accrued salaries, wages & benefits, and increased taxes payable, partially offset by decreased accounts payable.

• 2021 – Decreased primarily from increased accounts receivable, accrued salaries, wages and benefits and inventories, offset by increased accounts payable, taxes payable and legal accruals .

The increase in accounts receivable is largely due to the increase in sales.

The increase in accrued salaries, wages and benefits is primarily due to increased incentive-based compensation.

The increase in inventories is primarily due to increased livestock, raw material and grain costs.

The increase in accounts payable is largely due to increased input costs as well as the timing of payments.

The increase in taxes payable is driven by the timing of payments primarily related to the gain from the sale of our pet treats business in the fourth quarter of fiscal 2021.

The increase in legal accruals is due primarily to legal contingencies recorded during fiscal 2021.

• 2020 – Increased primarily due to decreased accounts receivable, decreased inventories, increased accrued salaries, wages & benefits, and increased taxes payable, partially offset by decreased accounts payable.

The changes in accounts receivable and accounts payable are largely due to the timing of payments and sales.

The decrease in inventories is primarily due to decreased inventory volumes in the Prepared Foods segment.

The increase in accrued salaries, wages and benefits is primarily due to increased incentive-based compensation.

The increase in taxes payable is primarily related to timing of payments, in large part due to payroll tax deferrals associated with the CARES Act.

2019 – Decreased primarily due to increased accounts receivable and inventory and decreased income taxes payable.

The increase in accounts receivable is primarily due to the timing of sales and payments.

The increase in inventory is primarily due to increased volumes and costs in the Prepared Foods segment.

Decreased income taxes payable is primarily due to reduced taxable income, change in federal tax rate and timing of payments related to the sale of non-protein businesses in fiscal 2018.

Cash Flows from Investing Activities

Cash Flows from Investing Activities in millions

Additions to property, plant and equipment $ (1,209) $ (1,199)

(Purchases of)/Proceeds from marketable securities, net (2) (18)

Acquisitions, net of cash acquired

Proceeds from sale of businesses 1,188 29

Acquisitions of Equity Investments (44) (183)

Net cash used for investing activities

Other, net 125 (52)

Net cash provided by (used for) investing activities $ 58 $ (1,423)

• Additions to property, plant and equipment included spending for production growth, safety and animal well-being, in addition to acquiring new equipment, infrastructure replacements and upgrades to maintain competitive standing and position us for future opportunities.

Capital spending for fiscal 2021 is expected to approximate $1.2 billion to $1.4 billion and will include spending for capacity expansion, growth, safety, animal well-being, infrastructure replacements and upgrades, and operational improvements that are expected to result in production and labor efficiencies, yield improvements and sales channel flexibility.

• Capital spending for fiscal 2022 is expected to approximate $2 billion and will include spending for capacity expansion and utilization, automation to alleviate labor challenges and brand and product innovation.

• Purchases of marketable securities included funding for our deferred compensation plans.

Acquisitions, net of cash acquired, included the acquisition of two valued-added protein businesses in fiscal 2019.

For further description regarding these acquisitions refer to Part II, Item 8, Notes to the Consolidated Financial Statements, Note 3:

Acquisitions and Dispositions.

Acquisition of equity investments in fiscal 2020 is related to the purchases of a 40% interest in a vertically integrated Brazilian poultry producer and a 50% interest in a joint venture serving the worldwide fats and oils market.

Proceeds from sale of businesses related to the proceeds received from sale of a prepared foods business in fiscal 2020 and a chicken further processing facility in fiscal 2019.

• Proceeds from sale of businesses related to the proceeds received from sale of our pet treats business in fiscal 2021 and the sale of a prepared foods business in fiscal 2020.

For further description refer to Part II, Item 8, Notes to the Consolidated Financial Statements, Note 3:

Acquisitions and Dispositions.

Other, net primarily included deposits for capital expenditures in fiscal 2020 and primarily related to the net proceeds from the sale of an investment in fiscal 2019.

Cash Flows from Financing Activities

• 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 purchase 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 fiscal 2021 and fiscal 2020 primarily included changes in deposits for capital expenditures and for fiscal 2021, the receipt of $69 million related to split-dollar life insurance proceeds.

Cash Flows from Financing Activities in millions

Proceeds from issuance of debt $ 585 $ 1,609

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Purchases of Tyson Class A common stock (67) (207)

Dividends (636) (601)

Stock options exercised 41 30

Net cash provided by (used for) financing activities

Other, net (22) (18)

Net cash used for financing activities $ (2,731) $ (1,468)

• Proceeds from issuance of debt and borrowings/payments on revolving credit facility:

• 2021 – 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.

• 2020 – On March 27, 2020, we executed a new $1.5 billion term loan facility to repay our commercial paper, repay outstanding balances under our revolving credit facility and for general liquidity purposes.

2019 – Proceeds from issuance of debt included $1,800 million proceeds from the issuance of a 364-day term loan for the initial financing of the Keystone Foods acquisition and subsequent issuance of $2,800 million senior unsecured notes which were primarily used to extinguish our 364-day term loan and to repay commercial paper obligations used to fund the Keystone Foods acquisition as well as to fund all or a portion of the purchase price for the acquisition of the Thai and European operations.

• Payments on debt included:

• 2021 – In February 2021, we repaid $750 million of the $1.5 billion outstanding under our revolving credit facility.

On March 22, 2021, we executed a new $500 million term loan facility due March 2023.

The Company used the proceeds of the new term loan, together with $250 million in cash on hand, to repay in full the remaining $750 million outstanding under the Company's existing $1.5 billion term loan facility due March 2022.

On September 30, 2021, the Company used cash on hand to repay in full the $500 million term loan facility due March 2023.

On July 23, 2021, we redeemed the $500 million outstanding balance of the Senior Notes due August 2021 using cash on hand.

• 2020 – We extinguished the $350 million outstanding balance of our senior notes due June 2020, the $400 million outstanding balance of our senior notes due August 2020 and the $278 million outstanding balance of our senior notes due September 2020 using cash on hand.

2019 – We extinguished the $1,800 million outstanding balance of our 364-day term loan, the $300 million outstanding balance of our May 2019 Notes and the $1,000 million outstanding balance of our August 2019 Notes using proceeds received from the issuance of debt, cash on hand and other liquidity sources.

• Proceeds from issuance and repayment of short-term debt in the form of commercial paper:

• 2020 – We had net repayments of $999 million to our unsecured short-term promissory notes ("commercial paper") pursuant to our commercial paper program.

2019 – We had net issuances of $395 million to our commercial paper pursuant to our commercial paper program.

• Purchases of Tyson Class A common stock included:

$150 million for shares repurchased pursuant to our share repurchase program in both fiscal 2020 and fiscal 2019 .

• $150 million for shares repurchased pursuant to our share repurchase program in fiscal 2020.

• $67 million and $57 million for shares repurchased to fund certain obligations under our equity compensation plans in fiscal 2021 and 2020, respectively.

• Dividends paid during fiscal 2021 included a 6% increase to our fiscal 2020 quarterly dividend rate.

Expiration Date

Outstanding Letters of Credit (no draw downs)

Amount Available at October 3, 2020

Liquidity in millions

Expiration Date Facility

Amount Outstanding Letters of Credit (no draw downs) Amount

Borrowed Amount Available at October 2, 2021

Cash and cash equivalents $ 2,507

Short-term investments —

Term loan facility

Revolving credit facility

Revolving credit facility September 2026 $ 2,250 $ — $ — 2,250

Commercial Paper —

Total liquidity $ 4,757

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 October 3, 2020 , we had current debt of $548 million , which we intend to repay with cash generated from our operating activities and other existing or new liquidity sources.

• Liquidity includes cash and cash equivalents, short-term investments, and availability under our revolving credit facility, less outstanding commercial paper balance.

• At October 2, 2021, we had current debt and accrued legal contingencies of $1,067 million and $567 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.

Our maximum borrowing under the revolving credit facility during fiscal 2020 was $390 million.

We had no borrowings under the revolving credit facility during fiscal 2021.

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 $380 million for fiscal 2022.

Our ratio of short-term assets to short-term liabilities ("current ratio") was 1.9 to 1 and 1.3 to 1 at October 3, 2020 , and September 28, 2019 , respectively.

The increase in fiscal 2020 was primarily due to increased cash and reduced current debt.

• Our ratio of short-term assets to short-term liabilities ("current ratio") was 1.6 to 1 and 1.8 to 1 at October 2, 2021, and October 3, 2020, respectively.

The decrease in fiscal 2021 was primarily due to increased accounts payable, current debt and legal contingency accruals, partially offset by increased cash, accounts receivable and inventories.

• At October 2, 2021, $464 million of our cash was held in the international accounts of our foreign subsidiaries.

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Capital Resources

Credit and Term Loan Facilities

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.

Additionally, we have a $1.5 billion committed term loan facility which was fully drawn as of October 3, 2020.

At October 3, 2020 , amounts available for borrowing under our revolving credit and term loan facilities totaled $1.75 billion .

At October 2, 2021, 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.

Our term loan facility is funded by a syndicate of 5 banks, with commitments ranging from $200 million to $350 million per bank.

The syndicates include bank holding companies that are required to be adequately capitalized under federal bank regulatory agency requirements.

Commercial Paper Program

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As of October 2, 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, due to the current market environment which has been impacted in part by COVID-19.

Our ability to access commercial paper in the future may be limited or its costs increased.

Capitalization

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We monitor the ratio of our net debt to EBITDA as support for our long-term financing decisions.

At October 3, 2020 , and September 28, 2019 , the ratio of our net debt to EBITDA was 2.2x and 2.9x, respectively.

Refer to Part II, Item 6, Selected Financial Data, for an explanation and reconciliation to comparable GAAP measures.

The decrease in this ratio for fiscal 2020 is due to a decrease in net debt of $1,528 million and an increase in EBITDA.

At October 2, 2021, and October 3, 2020, the ratio of our net debt to EBITDA was 1.2x and 2.3x, respectively.

Refer to Other Key Financial Measures below for an explanation and reconciliation to comparable Generally Accepted Accounting Principles (“GAAP ” ) measures.

Credit Ratings

Term Loan Facility due March 2022

Standard & Poor's Rating Services', a Standard & Poor's Financial Services LLC business ("S&P"), applicable rating is "BBB+."

Moody’s Investor Service, Inc.'s ("Moody's") applicable rating is "Baa2." Fitch Ratings', a wholly owned subsidiary of Fimlac, S.A.

("Fitch"), applicable rating is "BBB." The below table outlines the borrowing spread on the outstanding principal balance of our term loan that corresponds to the applicable ratings levels from S&P, Moody's and Fitch.

Ratings Level (S&P/Moody's/Fitch)

Borrowing Spread through March 30, 2021

Borrowing Spread

March 31, 2021 through March 27, 2022

A-/A3/A- or above

BBB+/Baa1/BBB+

BBB/Baa2/BBB (current level)

BBB-/Baa3/BBB-

BB+/Ba1/BB+ or lower

Revolving Credit Facility

S&P's applicable rating is "BBB+." Moody's applicable rating is "Baa2." Fitch's applicable rating is "BBB." The below table outlines the fees paid on the unused portion of the facility ("Facility Fee Rate") and letter of credit fees and borrowings ("All-in Borrowing Spread") that corresponds to the applicable ratings levels from S&P, Moody's and Fitch.

Ratings Level (S&P/Moody's/Fitch)

Facility Fee Rate

All-in Borrowing Spread

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

A-/A3/A- or above 0.090 % 1.000 %

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BB+/Ba1/BB+ or lower 0.225 % 1.625 %

In the event the rating levels are split for either facility, the applicable fees and spread will be based upon the rating level in effect for two of the rating agencies, or, if all three rating agencies have different rating levels, the applicable fees and spread will be based upon the rating level that is between the rating levels of the other two rating agencies.

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 and term loan facilities contain affirmative and negative covenants that, among other things, may limit or restrict our ability to:

Our revolving credit facility contains affirmative and negative covenants that, among other things, may limit or restrict our ability to:

create liens and encumbrances;

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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.

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:

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Payments Due by Period

2026 and thereafter

2022 2023-2024 2025-2026 2027 and thereafter Total

Debt principal payments (1)

$ 1,069 $ 1,719 $ 828 $ 5,824 $ 9,440

Interest payments (2)

409 712 580 3,277 4,978

Guarantees (3)

24 15 34 26 99

Operating lease obligations (4)

162 214 116 61 553

Purchase obligations (5)

2,455 455 201 124 3,235

Capital expenditures (6)

1,610 727 — — 2,337

Other long-term liabilities (7)

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We have excluded future purchase commitments for contracts that do not meet these criteria.

Purchase orders are not included in the table, as a purchase order is an authorization to purchase and is cancelable.

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.

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(7) Other long-term liabilities primarily consist of deferred compensation, deferred income, self-insurance and asset retirement obligations.

Amount also consists of $185 million of payroll tax deferrals associated with the CARES Act, which we expect will be paid in fiscal 2022 and fiscal 2023.

Amount also consists of $134 million of payroll tax deferrals associated with the CARES Act, which we expect will be paid in fiscal 2023.

We are unable to reliably estimate the amount and timing of the remaining payments beyond fiscal 2021;

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Pensions and Other Postretirement Benefits.

In addition to the amounts shown above in the table, we have unrecognized tax benefits of $146 million and related interest and penalties of $51 million at October 3, 2020 , recorded as liabilities.

In addition to the amounts shown above in the table, we have unrecognized tax benefits of $135 million and related interest and penalties of $49 million at October 2, 2021, recorded in Other long-term liabilities.

The potential maximum contractual obligation associated with our cash flow assistance programs at October 2, 2021, based on the estimated fair values of the livestock supplier’s net tangible assets on that date, aggregated to approximately $305 million.

After analyzing residual credit risks and general market conditions, we had no allowance for these programs' estimated uncollectible receivables at October 2, 2021.

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

2021 2020 2019

Net income $ 3,060 $ 2,071 $ 1,993

Interest income (8) (10) (11)

Interest expense 428 485 462

Income tax expense 981 593 381

Depreciation 934 900 819

Amortization (a) 261 278 267

EBITDA $ 5,656 $ 4,317 $ 3,911

Total gross debt $ 9,348 $ 11,339 $ 11,932

Cash and cash equivalents (2,507) (1,420) (484)

Short-term investments

Total net debt $ 6,841 $ 9,919 $ 11,447

Ratio Calculations:

Gross debt/EBITDA 1.7x 2.6x 3.1x

Net debt/EBITDA 1.2x 2.3x 2.9x

Return on invested capital (b) 13.3 % 9.2 % 9.7 %

Total debt to capitalization (c) 34.4 % 42.4 % 45.8 %

Book value per share (d) $ 48.95 $ 42.25 $ 38.59

(a) Excludes the amortization of debt issuance and debt discount expense of $19 million, $14 million, $12 million for fiscal 2021, 2020 and 2019, 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

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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.

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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 21:

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.

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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.

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We do not believe there is a reasonable likelihood there will be a material change in the estimates or assumptions used to recognize revenue.

However, if actual results are not consistent with our estimates or assumptions, we may be exposed to gains or losses that could be material.

We adopted the FASB’s new guidance on revenue recognition in fiscal 2019.

The adoption of this standard did not have a material impact on our consolidated financial statements.

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.

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Judgments and Uncertainties

Our self-insurance liability contains uncertainties due to assumptions required and judgment used.

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.

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A 10% change in the actuarial estimate at October 2, 2021, would not have a significant impact on our liability.

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.

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Judgments and Uncertainties

Changes in tax laws and rates could affect recorded deferred tax assets and liabilities in the future.

Changes in projected future earnings could affect the recorded valuation allowances in the future.

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Effect if Actual Results Differ From Assumptions

We do not believe there is a reasonable likelihood there will be a material change in the tax related balances or valuation allowances.

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.

However, due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the current estimate of the tax liabilities.

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Defined benefit pension plans

Description :

We sponsor six defined benefit pension plans that provide retirement benefits to certain team members.

We also participate in multi-employer plans that provide defined benefits to certain team members covered by collective bargaining agreements.

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.

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We accumulate and amortize the effect of actuarial gains and losses over future periods.

Net periodic benefit credit for the defined benefit pension plans was $103 million in fiscal 2020, primarily due to the termination of two of our defined benefit pension plans during fiscal 2020.

Net periodic benefit cost for the defined benefit pension plans was $11 million in fiscal 2021.

The projected benefit obligation was $248 million at the end of fiscal 2021.

Unrecognized actuarial loss was $40 million at the end of fiscal 2021.

We currently expect net periodic benefit cost for fiscal 2021 to be approximately $11 million.

We currently expect net periodic benefit cost associated with our pension plans to be approximately $10 million in fiscal 2022.

We expect to contribute approximately $14 million of cash to our pension plans in fiscal 2022.

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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.

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We estimate the fair value of our reporting units considering the use of various valuation techniques, with the primary technique being an income approach (discounted cash flow method) and another technique being a market approach (guideline public company method), which use significant unobservable inputs, or Level 3 inputs, as defined by the fair value hierarchy.

We include assumptions about sales, operating margins, growth rates, discount rates and valuation multiples which consider our budgets, business plans, economic projections and marketplace data, and are believed to reflect market participant views which would exist in an exit transaction.

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.

Our Domestic Chicken reporting unit had goodwill at October 3, 2020 of $3,266 million.

Our Chicken segment reporting units had goodwill at October 2, 2021 of $3.3 billion.

We generally assumed operating margins in future years would normalize over time as we believe this is consistent with market participant views in an exit transaction.

Had we assumed future operating margins consistent with those realized in the current fiscal year, we would have failed the quantitative step of the annual impairment test, which may have resulted in a material goodwill impairment loss.

The current year Domestic Chicken reporting unit results were not indicative of future market participant expectations in an exit transaction primarily due to unprecedented market disruptions and incremental costs associated with COVID-19, which impacts we expect to be mostly temporary in nature.

To pass the first step of the annual impairment test in fiscal 2020, the Domestic Chicken reporting unit’s projected long-term operating margins, utilizing the discounted cash flow method, had to exceed 4% which has been achieved in each of the previous eight fiscal years.

An increase in the discount rate of approximately 50 basis points would have caused the carrying value of the Domestic Chicken reporting unit to exceed its discounted cash flows' fair value.

Our International reporting unit, which is presented in International/Other for segment presentation, had goodwill at October 3, 2020 of $392 million.

The current year results were not indicative of future market participant expectations in an exit transaction primarily due to a decline in hatch rate, a challenging labor environment and market disruptions, which impacts we expect to be mostly temporary in nature.

To pass the first step of the annual impairment test in fiscal 2021, projected long-term operating margins, utilizing the discounted cash flow method, had to exceed approximately 3.1% on a weighted average basis, which has been achieved in eight of the previous ten years.

An increase in the discount rates of approximately 130 basis points on a weighted average basis would have caused the carrying values of our material Chicken reporting units to exceed their discounted cash flows' fair values.

Our International reporting units, which are presented in International/Other for segment presentation, had goodwill at October 2, 2021 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.

The majority of the International reporting unit, including all of its goodwill, originated from acquisitions in fiscal 2019 and fiscal 2018.

Had we assumed future operating margins consistent with those realized in the current fiscal year, reporting units with goodwill totaling $0.2 billion at October 2, 2021 would have failed the quantitative step of the annual impairment test, which may have resulted in a material goodwill impairment loss.

We are still integrating the recent acquisitions and executing our international and global business strategy, in addition to managing through the temporary impacts of COVID-19.

To pass the first step of the annual impairment test in fiscal 2020, the International reporting unit projected long-term operating margins, utilizing the discounted cash flow method, had to exceed 4%.

An increase in the discount rate of approximately 150 basis points would have caused the carrying value of the International reporting unit to exceed its discounted cash flows' fair value.

To pass the first step of the annual impairment test in fiscal 2021, projected long-term operating margins, utilizing the discounted cash flow method, had to exceed 2%.

An increase in the discount rates of approximately 50 basis points would have caused the carrying values of the International reporting units to exceed their discounted cash flows' 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, operating margins, growth rates, royalty rates and discount rates based on budgets, business plans, economic projections, anticipated future cash flows and marketplace data.

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 that could positively or negatively impact the anticipated future economic and operating conditions.

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If our actual results are not consistent with our estimates and assumptions used to calculate fair value, it could result in material impairments of our goodwill.

All of our material reporting units’ estimated fair value exceeded their carrying value by more than 20% at the date of their most recent estimated fair value determination, other than the Domestic Chicken reporting unit.

Consequently, other than the Domestic Chicken reporting unit, we do not currently consider any of our other material reporting units at significant risk of impairment.

Consequently, we do not currently consider any of our other material reporting units at significant risk of impairment.

Our fiscal 2021, 2020, and 2019 indefinite life intangible assets impairment analyses did not result in an impairment charge.

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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.

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Judgments and Uncertainties

Our impairment analysis contains uncertainties due to judgment in assumptions, including useful lives and intended use of assets, observable market valuations, forecasted sales, operating margins, growth rates, royalty rates and discount rates based on budgets, business plans, economic projections, anticipated future cash flows and marketplace data that reflects the risk inherent in future cash flows to determine fair value.

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

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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.

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Significant judgment is often required in estimating the fair value of assets acquired and liabilities assumed, particularly intangible assets.

We make estimates and assumptions about projected future cash flows including sales, operating margins, attrition rates, growth rates, and discount rates based on historical results, business plans, expected synergies, perceived risk and marketplace data considering the perspective of marketplace participants.

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.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis