Tyson Foods, Inc. — Q3 FY2022 Form 10-Q
Reporting period: Quarter and nine months ended July 2, 2022; comparisons are with the periods ended July 3, 2021, except balance-sheet comparisons, which are with October 2, 2021. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance
| Metric | Q3 FY2022 | Q3 FY2021 | Nine months FY2022 | Nine months FY2021 |
|---|---|---|---|---|
| Sales | $13,495 | $12,478 | $39,545 | $34,238 |
| Gross profit | $1,611 | $1,620 | $5,361 | $4,050 |
| Operating income | $1,033 | $1,062 | $3,644 | $2,487 |
| Net income attributable to Tyson | $750 | $749 | $2,700 | $1,692 |
| Diluted EPS | $2.07 | $2.05 | $7.42 | $4.63 |
| Operating margin | 7.7% | 8.5% | 9.2% | 7.3% |
Q3 sales increased 8.2%, mainly from higher prices, partly offset by lower volume. Management attributed higher pricing to inflation and recovery of rising costs. Q3 gross profit was slightly lower and operating income fell 3%, while Tyson-attributable net income was approximately flat. For the first nine months, sales rose 16% and operating income rose 47%.
Cash flow: Operating cash flow was $1,890 for the first nine months, down from $2,656. The $1,925 net cash outflow from changes in operating assets and liabilities included increased inventory; management also cited higher legal, payroll-tax and income-tax payments. Capital expenditures were $1,323, versus $859. Investing cash use was $1,325; financing cash use was $2,128. Cash and cash equivalents ended at $1,056, down from $2,507 at fiscal year-end.
Liquidity and debt: Total debt was $8,328, including $67 current and $8,261 long-term, compared with $9,348 at October 2, 2021. The company repaid $1 billion of notes due June 2022 using cash. It reported $3,306 of total liquidity: $1,056 cash plus $2,250 available under its revolving facility; there was no commercial paper or revolving-facility borrowing. Current ratio was 2.0. Net debt/EBITDA was 1.1x, versus 1.2x at fiscal year-end, although net debt itself increased to $7,272 from $6,841 as cash declined. The company was in compliance with debt covenants.
Segment performance and changes
- Beef: Q3 operating income fell to $533 from $1,120; margin fell to 10.7% from 22.6%, as margins eased from exceptionally high prior-year levels and costs remained elevated. Nine-month operating income edged up to $2,127 from $2,093.
- Pork: Q3 operating income declined to $25 from $67 amid compressed margins and weaker demand. Nine-month operating income was nearly flat at $248.
- Chicken: Q3 operating income was $277 versus a $279 loss; nine-month income was $615 versus a $489 loss. Higher pricing helped, but feed, labor and supply-chain costs remained pressures. Comparisons benefit materially from prior-year legal contingency charges.
- Prepared Foods: Q3 operating income rose to $186 from $150, while nine-month income was approximately flat at $635. Higher prices were offset by input-cost inflation and lower volumes.
Outlook, commentary and risks
- Management expected fiscal 2022 retail demand to remain elevated versus pre-pandemic levels and foodservice demand to continue returning toward historical levels. It said inflation in labor, freight, materials and feed costs was expected to persist through the remainder of FY2022.
- Fiscal 2022 capital spending was expected to approximate $1.9 billion; expected net interest expense was approximately $350 million.
- A productivity program launched in FY2022 targets more than $400 million of savings in FY2022 and $1 billion by the end of FY2024, relative to the FY2021 cost baseline. Management said it was on track for its FY2022 target and did not expect program costs to be material.
- COVID-19-related labor availability, absenteeism and supply-chain constraints continued to affect operations. Management also identified feed and livestock price volatility, inflation, disease outbreaks, trade access, litigation, customer demand and rising-rate/refinancing exposure as risks. Russia’s invasion of Ukraine had not materially affected results directly as of the reporting date, but escalation or additional sanctions could affect performance.
- Unusual items: FY2022 results included production-facility fire insurance proceeds, net of costs, of $35 in Q3 and $53 for nine months; nine-month results also included a $36 tax benefit from remeasuring deferred taxes. FY2021 comparisons included chicken legal-contingency charges of $306 in Q3 and $626 for nine months, and a $23 China facility-relocation charge for nine months.
- Contingencies: The filing describes ongoing broiler, pork, beef, turkey and wage-rate litigation and investigations. Certain chicken antitrust class claims were settled, and the company continued to cooperate with the DOJ under conditional leniency for its self-reported matters. Tyson had not recorded liabilities for several matters it said were not probable or reasonably estimable. A Mexican tax assessment related to a 2015 sale was approximately $380; the company disputed it and recorded no liability. EPA proposed penalties totaling $541,243 for alleged Clean Air Act violations at two Maine facilities; negotiations were ongoing.
Important facts for investors to verify
- Whether elevated pricing can offset ongoing input-cost inflation without further volume or margin deterioration, particularly in Beef and Pork.
- How much of reported growth and profitability reflects underlying operations versus prior-year legal charges, insurance proceeds, tax benefits and other unusual items.
- Cash-flow conversion and working-capital trends, especially inventory growth, alongside the planned $1.9 billion FY2022 capital program and continued shareholder returns.
- Developments, potential financial exposure and accrual adequacy for antitrust, wage-rate, tax and regulatory matters, including the disputed Mexican assessment.
- Progress toward the productivity savings targets and the effect of labor availability, supply constraints, commodity prices and demand on results.