Tyson Foods, Inc. — Q3 FY2021 Form 10-Q
Reporting period: Three and nine months ended July 3, 2021. Comparisons are to the corresponding periods ended June 27, 2020; those 2020 statements were revised for a cattle-inventory misstatement. Dollar amounts below are in millions except per-share data.
Financial performance
| Metric | Q3 FY2021 | Q3 FY2020 | Nine months FY2021 | Nine months FY2020 |
|---|---|---|---|---|
| Sales | $12,478 | $10,022 | $34,238 | $31,725 |
| Gross profit | $1,620 | $1,313 | $4,050 | $3,774 |
| Operating income | $1,062 | $773 | $2,487 | $2,046 |
| Net income attributable to Tyson | $749 | $526 | $1,692 | $1,407 |
| Diluted EPS | $2.05 | $1.44 | $4.63 | $3.85 |
| Operating margin | 8.5% | 7.7% | 7.3% | 6.4% |
Q3 sales increased 24.5%, reflecting higher volume and average selling prices; reported sales included a $225 million reduction for chicken-related legal contingencies. Gross margin was approximately 13.0%, versus 13.1% a year earlier. For the nine months, reported sales growth was 7.9%, also reduced by $545 million of legal accruals.
Cash flow and investment: Nine-month operating cash flow was $2,656, compared with $2,708. Capital expenditures were $859; management expected approximately $1.3 billion for FY2021. Investing activities used $783, and financing activities used $1,542, including $1,608 of debt repayments and $477 of dividends.
Balance sheet and liquidity: At July 3, cash and equivalents were $1,613; current assets were $9,208 and current liabilities $6,184, for a 1.5 current ratio. Total debt was $10,352 ($1,566 current and $8,786 long-term), down from $11,339 at October 3, 2020. Liquidity was reported at $3,363, including $1,750 available on the undrawn revolving facility. Net debt/EBITDA was 1.9x, versus 2.3x at October 3, 2020. The company was in compliance with debt covenants.
Material changes and segment results
- Beef: Q3 operating income rose to $1,120 from $649, on strong demand and improved throughput. Nine-month results included a $55 recovery gain related to the supplier misappropriation, versus a $56 loss in the prior-year period.
- Pork: Q3 operating income fell to $67 from $107; nine-month income was $250 versus $391. Lower hog supplies relative to capacity, labor challenges, production inefficiencies and derivative results weighed on profit despite higher sales.
- Chicken: Q3 operating loss widened to $279 from $120; nine-month results were a $489 loss versus $36 income. The periods included legal contingency charges of $306 and $626, respectively, alongside higher feed costs, labor and production pressures.
- Prepared Foods: Q3 operating income was $150 versus $145; nine-month income rose to $633 from $494. Pricing and mix helped offset higher raw material and operating costs.
- Q3 sales increased across all segments, supported by foodservice recovery, stronger retail demand and higher pricing. Operating costs, particularly labor, freight, materials and feed ingredients, were inflationary.
Outlook, risks and unusual items
- Management expected inflation in labor, freight and materials to continue through the remainder of FY2021 and said higher grain and feed costs affected all segments; the company was pursuing cost recovery through pricing. No specific earnings or sales forecast is stated in the supplied filing text.
- Management expected approximately $420 million of net interest expense in FY2021 and said liquidity should support operations, capital spending, dividends and maturing debt.
- The pet treats business sale for $1.2 billion cash, subject to adjustments, closed July 6, 2021, after quarter-end. Management anticipated a gain in Q4 FY2021.
- COVID-19 continued to affect worker availability, throughput, costs and channel mix. Direct incremental COVID-related expense was $55 million in Q3 and $270 million for the nine months; management expected pandemic-related challenges to continue, with longer-term effects uncertain.
- Chicken antitrust matters drove substantial accruals: $545 million recorded for broiler-related claims, including settlements and estimated remaining claims; an additional $21 million grower-class settlement was subject to court approval. Other antitrust, labor, cattle, pork, turkey and COVID-related claims also remained outstanding. The filing says outcomes and potential losses for certain matters cannot be reliably estimated.
- A material weakness in controls over verification and reconciliation of live cattle inventory remained unremediated; disclosure controls were therefore concluded ineffective as of July 3, 2021. The company described remediation measures and ongoing testing. Prior financial statements were revised after a supplier misappropriation caused inventory overstatements in earlier periods; the company stated the misstatements were not material to previously issued statements.
- After quarter-end, the company redeemed $500 million of 2.25% notes due August 2021 using cash. A fire at its Hanceville, Alabama rendering facility also occurred after quarter-end; management said it did not then expect a material financial or liquidity impact, while evaluation continued.
Most important facts for investors to verify
- How chicken litigation estimates and settlements develop, including whether further accruals or cash payments are required.
- Whether the live-cattle inventory control weakness is remediated and controls operate effectively over a sufficient testing period.
- Whether inflation, labor availability, feed costs and production conditions pressure margins, particularly in Chicken and Pork.
- Final sale proceeds and the Q4 gain from the pet treats divestiture, and the financial effect of the Hanceville facility fire.
- Cash generation, debt maturities, liquidity and covenant compliance relative to the company’s stated capital-spending and dividend plans.