Tyson Foods, Inc. — Q3 FY2020 Form 10-Q
Reporting period: Third quarter ended June 27, 2020; comparative quarter ended June 29, 2019. The filing also reports the nine months ended on those dates. Amounts are in millions of dollars, except per-share data and ratios, unless noted.
Business context and financial results
Tyson operates Beef, Pork, Chicken and Prepared Foods segments, with international operations included in International/Other. COVID-19 drove production slowdowns and temporary facility idling, higher costs, and a shift in demand from foodservice to retail. Retail growth did not make up for lower foodservice volumes.
| Metric | Q3 FY2020 | Q3 FY2019 | Nine months FY2020 | Nine months FY2019 |
|---|---|---|---|---|
| Sales | $10,022 | $10,885 | $31,725 | $31,521 |
| Gross profit | $1,313 | $1,336 | $3,774 | $3,883 |
| Operating income | $775 | $781 | $2,102 | $2,223 |
| Net income attributable to Tyson | $527 | $676 | $1,448 | $1,653 |
| Diluted EPS | $1.44 | $1.84 | $3.96 | $4.51 |
| Operating margin | 7.7% | 7.2% | 6.6% | 7.1% |
Third-quarter sales fell 7.9%, as volume declined 10.6% and average selling price rose 2.6%. Nine-month sales increased 0.6%; volume fell 1.1% while average selling price rose 1.8%. Third-quarter gross margin was approximately 13.1%, versus 12.3% a year earlier. Net income and EPS declined despite improved Beef and Pork results.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $2,708, versus $1,535 in the prior-year period. Capital expenditures were $907, implying operating cash flow less capital expenditures of approximately $1,801, compared with approximately $564 a year earlier.
- Cash and cash equivalents were $1,365 at June 27, 2020, up from $484 at September 28, 2019. The cash flow statement reports $1,447 of cash and restricted cash, including $82 of restricted cash.
- Total debt was $12,029, versus $11,932 at fiscal year-end; net debt was $10,662, versus $11,447. Net debt/EBITDA was 2.7x, down from 2.9x. The company reported total liquidity of $3,117, including $1,750 available under its revolving credit facility; current debt was $750.
- Current ratio was 1.80x, compared with 1.30x at September 28, 2019. The company stated it expected liquidity to be sufficient for operations, capital spending, dividends and maturing debt.
Material changes versus comparable periods
- Segment results diverged: Q3 Beef operating income rose to $651 from $270, and Pork rose to $107 from $42. Chicken swung to a $120 operating loss from $230 income; Prepared Foods income declined to $145 from $229. Nine-month operating income also increased in Beef and Pork but fell substantially in Chicken and Prepared Foods.
- COVID-19 expense and volume impacts: Tyson recorded approximately $340 of direct incremental COVID-19 costs in Q3, including $114 of frontline “thank you” bonuses. Lower throughput reduced sales volumes; operational disruption, worker costs and facility downtime raised costs.
- Cash generation improved: Operating cash flow increased principally as operating asset and liability changes contributed $357, compared with a $1,021 use of cash in the prior-year period.
- Financing mix changed: Tyson drew a $1,500 term loan in April to repay $1,000 of commercial paper and $200 of revolving-credit borrowings. It repaid $350 of notes due June 2020 with cash. No commercial paper or revolving-credit borrowings were outstanding at quarter-end.
- Prior-year comparability: Q3 FY2019 included a $55 pretax investment-sale gain and a $105 after-tax benefit from release of tax reserves. FY2020 included pension termination gains of $116 pretax for the nine months, including $6 in Q3. The tax rate was 21.0% in Q3 FY2020 versus 6.0% in Q3 FY2019; the prior-year rate benefited from the tax-reserve reversal.
Outlook, commentary, risks and unusual items
- Management expected the company to remain profitable for the remainder of FY2020, but anticipated COVID-related operating challenges and lower volumes to pressure overall earnings. It noted Chicken and Prepared Foods volumes were expected to remain lower for the rest of FY2020; longer-term pandemic effects were uncertain.
- Fiscal 2020 capital spending was expected to approximate $1.2 billion, and net interest expense was expected to approximate $475. The 2020 restructuring program was expected to generate savings of approximately $55 in FY2020 and $65 in FY2021; it targeted about 500 positions and had incurred $39 of charges by the filing date.
- Management estimated more than $160 of FY2020 liquidity benefit from deferring the employer portion of Social Security payments under the CARES Act. It recognized an approximately $20 payroll tax credit benefit in Q3.
- Management said it might suspend share repurchases, reduce or suspend dividends, or take other cash-preservation measures if needed. The company had paid $451 of dividends during the nine months and repurchased $200 of Class A shares.
- Risks include worker availability and facility disruptions, foodservice demand weakness, raw-material and commodity volatility, supply-chain and export logistics interruptions, and possible impairment or inventory adjustments. Tyson also disclosed multiple material antitrust matters involving poultry, pork, beef, turkey and grower compensation, as well as litigation relating to COVID-19 and environmental matters. The filing does not provide a clear estimate of potential losses for the described material legal proceedings.
- Unusual items included $15 of Q3 Beef fire-insurance proceeds, net of costs, and material derivative effects; Chicken operating results were affected by $110 of net derivative losses in Q3 and the first nine months. Tyson disclosed that it had self-reported information to the DOJ in the poultry investigation and was cooperating under its Corporate Leniency Program application.
- Subsequent event disclosed in the filing: on July 31, 2020, CEO Noel White announced he would step down effective October 3, 2020, with President Dean Banks appointed CEO from that date. The CFO also appointed a new Chief Accounting Officer on July 31.
Most important facts for investors to verify
- Whether COVID-19-related staffing, safety measures, production interruptions and foodservice weakness persisted or worsened after June 27, and how those factors affected segment volumes and margins.
- Whether Chicken and Prepared Foods recovered from Q3 losses or margin declines, including the effects of commodity costs, product mix and derivative positions.
- Whether operating cash flow remained strong after the favorable working-capital contribution, and whether liquidity and debt maturities remained manageable.
- Whether management achieved the stated FY2020 capital-spending, interest-expense and restructuring-savings expectations, and whether dividends or repurchases changed.
- Developments in the DOJ investigations, the poultry leniency application and other antitrust and legal proceedings, including any new loss estimates or accruals.
- Execution of the October 2020 CEO transition and any resulting changes in strategy or operating priorities.