Tyson Foods, Inc. — Fiscal 2023 First-Quarter 10-Q
Reporting period: Three months ended December 31, 2022; comparative period ended January 1, 2022. Tyson is a diversified protein and prepared-foods producer with Beef, Pork, Chicken and Prepared Foods reporting segments. All amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Sales | $13.260 billion | $12.933 billion | +2.5% |
| Gross profit | $968 million | $2.015 billion | -52% |
| Operating income | $467 million | $1.455 billion | -68% |
| Net income attributable to Tyson | $316 million | $1.121 billion | -72% |
| Diluted EPS | $0.88 | $3.07 | -71% |
| Cash from operations | $762 million | $1.432 billion | -47% |
Gross margin fell to 7.3% from 15.6%; operating margin was 3.5%, versus 11.3%. Cost of sales rose 12.6%, substantially faster than sales, reflecting higher input costs, including cattle, hogs, feed, labor and freight. SG&A declined to $501 million from $560 million. The effective tax rate rose to 26.1% from 20.2%.
Segment operating income (loss): Beef $166 million (down from $956 million); Pork $(21) million (versus $164 million); Chicken $69 million (versus $140 million); Prepared Foods $258 million (up from $186 million); International/Other $(5) million (versus $9 million). Prepared Foods was the only reportable segment with higher operating income.
Balance sheet, cash flow and capital
At December 31, 2022, cash was $654 million, total debt was $8.349 billion, and net debt was $7.693 billion. Net debt/EBITDA was 1.6x, up from 1.3x at October 1, 2022. Current assets were $8.953 billion and current liabilities $5.114 billion; the current ratio was 1.8. Reported liquidity was $2.906 billion, including $2.25 billion available on the revolving facility; there were no revolver borrowings or commercial paper outstanding at quarter-end. Current debt was $490 million. Management reported covenant compliance.
Operating cash flow was $762 million; capital expenditures were $589 million, leaving approximately $173 million after capital spending, before other investing and financing flows. Investing activities used $669 million, including acquisitions and equity investments; financing activities used $482 million, including $313 million of share repurchases and $169 million of dividends. Cash and cash equivalents declined $377 million during the quarter. The company repurchased 4.9 million shares for $313 million.
Material changes and notable items
- Sales growth was driven by higher volume (+0.8%) and average prices (+1.7%), but earnings fell sharply as cost inflation and margin compression outweighed revenue growth.
- Beef operating income declined as historically high margins normalized, beef prices softened and cattle costs increased. Pork moved to an operating loss amid compressed margins and derivative losses. Chicken earnings declined amid higher feed, labor and supply-chain costs and challenging export conditions. Prepared Foods improved through pricing, volume and mix.
- Q1 results included $35 million of net fire-insurance proceeds and $21 million of restructuring and related charges. Q1 FY2022 included $45 million of net fire-insurance proceeds and a $36 million after-tax deferred-tax remeasurement benefit.
- A $30 million estimate revision, primarily reducing employee-compensation accruals recorded at October 1, 2022, was made during the quarter.
- The company acquired a 60% stake in Supreme Foods Processing Company and a 15% stake in Agricultural Development Company for approximately $75 million, net of cash acquired. SFPC’s post-acquisition results were insignificant to income.
Outlook, risks and contingencies
- Management expects fiscal 2023 capital spending of approximately $2.5 billion and net interest expense of approximately $330 million. It anticipates operating-cost inflation to continue, though at a lower rate than in fiscal 2022, and expects a net cash outflow from operating-asset and liability changes as the business grows.
- Tyson had achieved more than $700 million of productivity savings in fiscal 2022 and said it believed it would exceed its $1 billion target in fiscal 2023, ahead of the original fiscal 2024 target date. No specific full-year sales or earnings guidance is provided in the filing text.
- The restructuring program is expected to generate approximately $274 million of cumulative pretax charges and be substantially complete in fiscal 2025; it includes relocating corporate teams to Springdale, Arkansas.
- Management identified inflation and commodity costs, labor availability, animal disease, export-market access, COVID-related operating disruption, foreign exchange, interest rates, and litigation as risks. Two International reporting units underwent interim goodwill impairment assessments; no impairment was recorded, but management noted that lower margins or higher discount rates could put carrying values at risk.
- Legal matters include broiler, pork and beef antitrust and wage-related litigation and investigations. The company reported a $111 million accrual for remaining broiler antitrust claims at quarter-end and conditional DOJ leniency for the matters it self-reported, contingent on continued cooperation. Tyson has not accrued for a Mexican tax assessment of approximately $411 million, which it disputes. Subsequent to quarter-end, an Oklahoma court entered findings in an environmental case and directed the parties to discuss remedies.
Important facts for investors to verify
- Whether segment margins—particularly Beef, Pork and Chicken—recover, and whether pricing can continue to offset feed, livestock, labor and other input-cost pressures.
- Whether the fiscal 2023 productivity-savings and capital-spending expectations are achieved, and how those plans affect cash generation and leverage.
- Updates to antitrust, wage, environmental and Mexican tax matters, including potential cash exposure beyond recorded accruals.
- Whether the International reporting units meet the operating-margin assumptions supporting the no-impairment conclusion.
- Subsequent-quarter commercial-paper borrowing: Tyson disclosed that it increased its balance by $355 million after quarter-end through the filing date.