Tyson Foods, Inc. — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2020, ended March 28, 2020. Comparisons are with the periods ended March 30, 2019. Amounts are in U.S. dollars.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Sales | $10.888 billion, up 4.3% | $21.703 billion, up 5.2% |
| Gross profit | $1.021 billion, versus $1.192 billion | $2.461 billion, versus $2.547 billion |
| Operating income | $501 million, versus $635 million | $1.327 billion, versus $1.442 billion |
| Net income attributable to Tyson | $364 million, versus $426 million | $921 million, versus $977 million |
| Diluted earnings per share | $1.00, versus $1.17 | $2.52, versus $2.67 |
| Operating margin | 4.6%, versus approximately 6.1% | Not stated as a consolidated margin |
| Cash provided by operating activities | Not provided separately | $1.260 billion, versus $939 million |
| Capital expenditures | Not provided separately | $624 million |
Quarterly gross margin was approximately 9.4%, compared with 11.4% a year earlier. Higher sales reflected increased volumes and average selling prices, including acquisition-related contributions. Higher input costs, derivative losses, and weaker Chicken and Prepared Foods results weighed on profitability.
Segments and material changes
- Beef: Q2 sales rose to $3.979 billion, while operating income fell to $109 million from $156 million. A facility fire had reduced capacity in Q1; six-month results included $16 million of net fire costs after insurance.
- Pork: Q2 sales increased to $1.266 billion and operating income was $93 million versus $100 million. Six-month operating income improved to $284 million from $195 million, supported by export markets and operating performance.
- Chicken: Q2 operating income declined to $99 million from $141 million; six-month income fell to $156 million from $301 million, amid challenging pricing, higher feed costs, derivatives and restructuring charges.
- Prepared Foods: Q2 operating income fell to $191 million from $245 million; six-month income declined to $349 million from $510 million, reflecting higher raw material costs and derivative losses.
- International/Other: Sales and operating results improved, largely from acquired Thai and European operations, Keystone Foods, and stronger China performance.
Financial position and liquidity
- At March 28, 2020, cash and cash equivalents were $437 million; current assets were $7.099 billion and current liabilities were $4.406 billion. The reported current ratio was 1.61.
- Total debt was $12.120 billion, including $10.978 billion of long-term debt. Net debt to EBITDA was 2.9x, unchanged from September 28, 2019. The company reported compliance with debt covenants.
- Reported liquidity was $2.489 billion at quarter-end. On April 1, Tyson drew the full $1.5 billion term loan and used proceeds to repay $1.0 billion of commercial paper and $200 million of revolver borrowings.
- Six-month cash flow from operations increased to $1.260 billion from $939 million. Investing activities used $877 million; financing activities used $339 million. Dividends paid were $301 million and share purchases were $196 million.
Outlook, risks and unusual items
- COVID-19: Management expected the pandemic to raise operating costs and reduce volumes for the rest of fiscal 2020. Foodservice demand shifted to retail, but retail gains were not expected to offset foodservice losses. Facility slowdowns or temporary closures, absenteeism, safety measures and supply-chain disruption were affecting production. Management expected the company to remain profitable in the second half, but anticipated lower overall earnings; the ultimate impact was uncertain.
- Management forecast fiscal 2020 capital spending of approximately $1.2 billion and net interest expense of approximately $475 million. It estimated employer Social Security tax deferrals under the CARES Act would exceed $150 million for fiscal 2020; the liquidity benefit is a deferral, not earnings guidance.
- Tyson recorded a $110 million pretax gain from pension plan terminations in Q2, a significant favorable nonrecurring item. Six-month results also included $52 million of restructuring charges and $16 million of net fire costs.
- Commodity volatility produced approximately $100 million of net derivative losses in Q2; management said most mark-to-market losses were expected to be offset in future periods by related physical purchases. Six-month results included approximately $55 million of net derivative losses and approximately $20 million of livestock inventory write-down expenses.
- A new restructuring program targets approximately 500 position eliminations and estimated savings of $55 million in fiscal 2020 and $65 million in fiscal 2021. Tyson recorded $39 million of pretax charges for the program in the first six months.
- Management said liquidity was expected to be adequate, but noted that share repurchases could be suspended and dividends reduced or suspended if needed. COVID-19 risks include workforce availability, facility operations, channel demand, input costs, export logistics, customer credit, liquidity access and potential asset impairments.
- Material legal matters include poultry, pork and beef antitrust litigation, employment-related claims, and environmental claims connected with a wastewater release at an Alabama facility. The filing states that outcomes and potential losses in certain matters cannot be reliably estimated.
Most important facts for investors to verify
- Whether COVID-19-related facility interruptions, worker availability and foodservice weakness persisted or worsened, and how these affected volumes, costs and margins.
- Whether the $110 million pension termination gain and derivative losses obscure underlying operating trends; compare segment results excluding unusual items where possible.
- Whether the April 1 term-loan refinancing and reported liquidity remain sufficient as debt matures, and whether planned capital spending and dividends are maintained.
- Whether Chicken and Prepared Foods recover from the reported cost and margin pressure, and whether restructuring savings are realized.
- Developments in antitrust, employment and environmental proceedings, including any changes to estimated exposure or recorded accruals.