Tyson Foods, Inc. — Q2 FY2023 Form 10-Q
Reporting period: Quarter and six months ended April 1, 2023. Tyson is a diversified protein and branded foods producer, reporting Beef, Pork, Chicken and Prepared Foods segments; International/Other is also presented in segment results. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 FY2023 | Q2 FY2022 | Six months FY2023 | Six months FY2022 |
|---|---|---|---|---|
| Sales | $13.133bn | $13.117bn | $26.393bn | $26.050bn |
| Gross profit | $527m | $1.735bn | $1.495bn | $3.750bn |
| Operating income (loss) | $(49)m | $1.156bn | $418m | $2.611bn |
| Net income (loss) attributable to Tyson | $(97)m | $829m | $219m | $1.950bn |
| Diluted EPS | $(0.28) | $2.28 | $0.61 | $5.35 |
| Operating margin | (0.4)% | Not stated | Not stated | Not stated |
Q2 sales were essentially flat: volume growth of 3.3% was mostly offset by a 3.2% decline in average selling prices. Cost of sales rose $1.224bn year over year, including higher input costs, $92m in Chicken plant-closure charges and increased inventory valuation adjustments. For the first six months, operating income fell 84% year over year.
Segments and material changes
- Beef: Q2 sales fell to $4.617bn from $5.034bn; operating income was approximately break-even versus $638m. Higher cattle costs and weaker beef demand and pricing pressured results. Six-month operating income was $166m versus $1.594bn, including $42m of insurance proceeds.
- Pork: Q2 operating loss was $33m versus $59m income; six-month operating loss was $54m versus $223m income. Lower selling prices, compressed margins and inflationary costs weighed on performance.
- Chicken: Q2 operating loss was $258m versus $198m income; six-month operating loss was $189m versus $338m income. Higher feed, labor and supply-chain costs, market conditions and plant closures were significant factors. Tyson announced closure of facilities in Glen Allen, Virginia, and Van Buren, Arkansas, with operations expected to cease in Q3 FY2023.
- Prepared Foods: Q2 operating income was $241m versus $263m; six-month income improved to $499m from $449m. Higher input costs pressured Q2, partly offset by pricing and product mix.
Cash flow, debt and liquidity
- Six-month operating cash flow was $769m, down from $1.224bn. Capital expenditures were $1.097bn, versus $847m a year earlier. Investing cash use totaled $1.176bn.
- Cash and cash equivalents were $543m at April 1, 2023, down from $1.031bn at October 1, 2022. Reported liquidity was $2.207bn, including cash, short-term investments and revolver availability net of commercial paper.
- Total debt was $8.930bn, including $1.065bn current debt and $593m of commercial paper outstanding; the commercial paper carried a 5.41% weighted-average rate and maturities under 25 days. Net debt/EBITDA was 2.4x, compared with 1.3x at fiscal year-end. Tyson reported compliance with debt covenants.
- On May 3, 2023, after quarter-end, Tyson entered into term loan facilities totaling $1.75bn to refinance commercial paper and for general corporate purposes. The facilities have three- and five-year maturities and require a minimum trailing-four-quarter interest coverage ratio of 3.50 to 1.0.
Outlook, commentary and risks
- Management expected FY2023 capital spending of approximately $2.3bn and net interest expense of approximately $340m. It expected $200m–$250m of net investing cash outflows associated with pending acquisition activity. The filing does not provide a clear full-year revenue or earnings forecast.
- Tyson said it had exceeded its aggregate $1bn productivity-savings target, relative to a FY2021 cost baseline, by Q2 FY2023—more than a year ahead of plan. The 2022 restructuring program is expected to produce approximately $271m in cumulative pretax charges and be substantially complete in FY2025; $109m had been recorded to date.
- Market pressures included cattle supply constraints and higher cattle costs, feed and labor inflation, challenging Chicken pricing and export markets, and uneven foodservice recovery. Management noted inflation was moderating and protein prices were beginning to level off, while pursuing price recovery for higher input costs.
- Key risks include commodity and input-price volatility, labor availability, animal disease and avian influenza, export-market access, litigation, rising interest costs and potential goodwill impairment. Two International reporting units had $0.2bn of goodwill and were sensitive to discount rates and achieving projected long-term margins; no impairment was recorded in Q2.
- Tyson disputes an approximately $470m Mexican tax assessment and has recorded no liability. It also faces multiple antitrust, wage-rate and other legal matters. The company reported a $111m accrual for remaining broiler antitrust opt-out claims; several other matters had no recorded liability because losses were not considered probable or reasonably estimable.
- Unusual Q2 items included $92m of Chicken plant-closure charges and $22m of restructuring and related charges. The first six months included $35m of net insurance proceeds, $43m of restructuring charges and the same $92m plant-closure charges.
Important facts for investors to verify
- Whether Beef and Chicken profitability recovers as supply, pricing, feed costs and operating conditions change.
- Cash generation relative to elevated capital spending, current debt maturities and the cost and actual use of the May 2023 term facilities.
- Execution and remaining costs of the Chicken facility closures and the corporate relocation/restructuring program.
- Progress and financial exposure in the Mexican tax dispute and material antitrust, wage and environmental proceedings.
- Assumptions supporting the carrying value of International goodwill and the achievement of management’s projected margins.