Tyson Foods, Inc. — Q1 Fiscal 2021 10-Q
Reporting period: Three months ended January 2, 2021; comparative quarter ended December 28, 2019. Dollar amounts are in millions unless noted. The prior-period figures were revised for cattle-inventory misstatements described in the filing.
Financial results and liquidity
| Metric | Q1 FY2021 | Q1 FY2020, revised | Change |
|---|---|---|---|
| Sales | $10,460 | $10,815 | -3.3% |
| Gross profit / margin | $1,177 / 11.3% | $1,440 / 13.3% | Margin down 2.0 percentage points |
| Operating income / margin | $705 / 6.7% | $758 / 7.0% | -7.0% |
| Net income attributable to Tyson | $467 | $505 | -7.5% |
| Diluted earnings per share | $1.28 | $1.38 | Down $0.10 |
| Cash provided by operations | $1,385 | $894 | Up $491 |
Sales volume fell 4.4%, while average sales price rose 4.2%; the average-price comparison excludes the $320 million legal accrual recorded as a reduction to sales. Operating cash flow benefited substantially from a $580 million contribution from changes in operating assets and liabilities, versus $83 million in the prior-year quarter.
At quarter-end, cash and cash equivalents were $2,406; total debt was $11,357, including $566 of current debt. The company reported $4,156 of liquidity, a current ratio of 1.8, and net debt/EBITDA of 2.1x, compared with 2.3x at fiscal 2020 year-end. It was in compliance with debt covenants. In February 2021, it repaid $750 million of its $1.5 billion term loan.
Segment performance and material changes
- Beef: Operating income rose to $528 from $342; sales increased to $3,987. Results included a $55 million cattle-inventory recovery gain, compared with a $68 million loss in the prior-year quarter.
- Pork: Operating income declined to $116 from $191. Higher livestock costs, COVID-related expenses and production inefficiencies weighed on results.
- Chicken: Recorded an operating loss of $216, versus income of $57. Results included a $320 million legal contingency accrual; lower throughput and COVID-related costs also affected performance.
- Prepared Foods: Operating income increased to $266 from $158, despite lower sales, with favorable product mix and lower commercial spending partly offset by higher costs and production inefficiencies.
The quarter included approximately $120 million of direct incremental COVID-19 expenses. The prior-year quarter included $52 million of restructuring charges and $16 million of net fire-related costs. The filing revised prior-period financial statements after identifying cattle inventory overstatements associated with a supplier; the revised December 2019 quarter included $68 million more SG&A expense and $52 million less net income than originally reported.
Outlook, risks and contingencies
- Management expected COVID-19 impacts, higher labor, freight and material costs, and production disruptions to continue through fiscal 2021. Retail demand gains had not offset foodservice declines; the company anticipated continued lower volumes in Chicken and Prepared Foods.
- Fiscal 2021 capital spending was expected to be approximately $1.3–$1.5 billion; net interest expense was expected to be approximately $430 million. Management said liquidity should be sufficient for operations, capital spending, dividends and debt obligations, while retaining the option to reduce dividends or suspend repurchases to preserve cash.
- Tyson recorded a $320 million accrual for poultry antitrust-related matters. It had agreed to pay the putative classes an aggregate $221.5 million, subject to final settlement agreements and court approval; the accrual also addressed remaining opt-out claims. Other poultry, pork, beef, turkey, grower and employment-related litigation remained outstanding.
- COVID-19 uncertainty could affect worker availability, facility operations, demand, supply-chain costs and asset valuations. Other disclosed risks include commodity and input-price volatility, livestock disease, trade and market access, litigation, and leverage.
- Disclosure controls were deemed ineffective at January 2, 2021 solely because of a material weakness in controls over the existence and reconciliation of live cattle inventory held by third-party suppliers. Management described inspection, physical verification and control-training remediation steps.
Investor verification priorities
- Track remediation and independent validation of cattle-inventory controls, and review any subsequent filings for further corrections.
- Check court approval, final payments and resolution of opt-out claims related to the poultry antitrust settlement, along with developments in other litigation.
- Assess whether COVID-19 operating costs, staffing constraints and foodservice weakness persist, particularly in Chicken and Prepared Foods.
- Evaluate cash-flow durability apart from working-capital timing, and confirm debt maturities, term-loan repayment and liquidity against planned capital spending and dividends.
- Separate recurring segment performance from the cattle recovery gain, legal accrual, derivative gains and other unusual items.