Tyson Foods 2012 Annual Report Download - page 35

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Judgments and Uncertainties: We estimate the fair value of our reporting units, generally our operating segments, using various
valuation techniques, with the primary technique being a discounted cash flow analysis, which uses significant unobservable inputs, or
Level 3 inputs, as defined by the fair value hierarchy. A discounted cash flow analysis requires us to make various judgmental
assumptions about sales, operating margins, growth rates and discount rates.
We include assumptions about sales, operating margins and growth rates which consider our budgets, business plans and economic
projections, 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 normalized operating
margin assumptions based on future expectations and operating margins historically realized in the reporting units' industries. For the
fiscal 2012 impairment test of material reporting units, our Domestic Chicken and Beef reporting units generally utilized operating
margins in future years in excess of the operating margin realized in the most recent year.
Our Domestic Chicken reporting unit had goodwill at September 29, 2012, totaling $900 million or 95% of our Chicken segment's
goodwill. We generally assumed operating margins in future years would return to our normalized range of 5.0% to 7.0%, 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 still passed the first step of the annual impairment test. Valuing the
Domestic Chicken reporting unit utilizing projected operating margins averaging less than 3.3% (breakeven), or a 2.3% increase in the
discount rate used in fiscal 2012, would have caused the carrying value of the Domestic Chicken reporting unit to be in excess of fair
value, which would have required the second step to be performed. Although our Domestic Chicken reporting unit realized operating
margins in fiscal 2012 in excess of the breakeven operating margins required to pass the first step, the Domestic Chicken reporting
unit may be challenged in fiscal 2013 to realize this level of operating margins, due to the expected temporary challenging market
conditions in fiscal 2013.
Our Beef reporting unit, which is our Beef operating segment, had goodwill at September 29, 2012, totaling $563 million. We
generally assumed operating margins in future years would return to our normalized range of 2.5% to 4.5%, 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 still passed the first step of the annual impairment test. Valuing the Beef reporting
unit utilizing projected operating margins averaging less than 1.4% (breakeven), or a 3.6% increase in the discount rate used in fiscal
2012, would have caused the carrying value of the Beef reporting unit to be in excess of fair value, which would have required the
second step to be performed. Although our Beef reporting unit realized operating margins in fiscal 2012 in excess of the breakeven
operating margins required to pass the first step, the Beef reporting unit may be challenged in fiscal 2013 to realize this level of
operating margins, due to the expected temporary challenging market conditions in fiscal 2013.
Other indefinite life intangible asset fair values have been calculated for trademarks using a royalty rate method. Assumptions about
royalty rates are based on the rates at which similar brands and trademarks are licensed in the marketplace.
Our impairment analysis contains uncertainties due to uncontrollable events that could positively or negatively impact the anticipated
future economic and operating conditions.
Effect if Actual Results Differ From Assumptions: We have not made any material changes in the accounting methodology used to
evaluate impairment of goodwill and other intangible assets during the last three years other than the adoption of the new guidance
allowing the option to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative
impairment test.
The discount rate used in our annual goodwill impairment test decreased to an average of 8.0% in fiscal 2012 from 8.8% in fiscal
2011. There were no significant changes in the other key estimates and assumptions.
During fiscal 2012, 2011 and 2010, all of our material reporting units that underwent a quantitative test passed the first step of the
goodwill impairment analysis and therefore, the second step was not necessary. In fiscal 2010, we recorded a $29 million full
impairment of an immaterial Chicken segment reporting unit's goodwill.
Some of the inherent estimates and assumptions used in determining fair value of the reporting units are outside the control of
management, including interest rates, cost of capital, tax rates and our credit ratings. While we believe we have made reasonable
estimates and assumptions to calculate the fair value of the reporting units and other indefinite life intangible assets, it is possible a
material change could occur. If our actual results are not consistent with our estimates and assumptions used to calculate fair value, we
may be required to perform the second step, which could result in additional 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. Consequently, we do not currently consider any of our material reporting units at significant risk of
failing the first step of the annual goodwill impairment test.
Our fiscal 2012 other indefinite life intangible asset impairment analysis did not result in a material impairment charge. A hypothetical
20% decrease in the fair value of intangible assets would not result in a material impairment.