Tyson Foods, Inc. — Q2 FY2021 Form 10-Q
Reporting period: Second quarter and first six months of fiscal 2021, ended April 3, 2021. Tyson operates Beef, Pork, Chicken and Prepared Foods segments. Comparative 2020 interim statements were revised for the cattle-supplier inventory misstatement described below.
Financial performance
| Metric | Q2 FY2021 | Q2 FY2020 | Six months FY2021 | Six months FY2020 |
|---|---|---|---|---|
| Sales | $11.300B | $10.888B | $21.760B | $21.703B |
| Operating income | $720M | $515M | $1.425B | $1.273B |
| Net income attributable to Tyson | $476M | $376M | $943M | $881M |
| Diluted EPS | $1.30 | $1.03 | $2.58 | $2.41 |
| Operating margin | 6.4% | 4.7% | 6.5% | 5.9% |
Q2 sales rose 3.8%, supported by a 7.5% increase in average selling price, despite a 3.7% volume decline. Six-month sales were nearly flat: pricing and mix gains were offset by lower volume and a $320M Chicken-segment legal contingency recorded as a reduction to sales. Q2 gross margin was approximately 11.1% versus 9.4%; six-month gross margin was approximately 11.2% versus 11.3%.
- Segment results, Q2 operating income: Beef $445M (up from $123M); Pork $67M (down from $93M); Chicken $6M (down from $99M); Prepared Foods $217M (up from $191M). For the six months, Chicken recorded a $210M operating loss, while Beef earned $973M and Prepared Foods $483M.
- Cash flow and investment: Six-month operating cash flow was $1.349B, versus $1.260B. Capital spending was $557M; management expected FY2021 capital spending at the low end of its $1.3B–$1.5B range.
- Debt and liquidity: Total debt was $10.364B, including $580M current debt; cash was $877M. Reported liquidity was $2.627B, including $1.750B available on the revolver. Net debt/EBITDA was 2.2x. The company reported covenant compliance and a 1.7 current ratio.
Material changes and unusual items
- Q2 operating income increased about 40%, but results varied sharply by segment. Beef and Prepared Foods improved; Pork and Chicken weakened. Higher prices offset volume declines, while input costs, labor and production inefficiencies pressured results.
- Tyson recorded $215M of direct incremental COVID-19 costs for the first six months ($95M in Q2), primarily for worker health, testing, sanitization and availability. These figures exclude indirect pandemic-related costs.
- The Chicken segment recorded a $320M legal contingency in Q1, principally related to broiler antitrust settlements and remaining opt-out claims. The company agreed to pay $221.5M to settle class claims; certain approvals remained pending, and opt-out claims were still being discussed.
- Beef results included a $55M gain from recovery of cattle inventory from a supplier. Prior-period results were revised after the supplier’s misrepresentations led to overstated live-cattle inventory. The company reported prior inventory overstatements of approximately $285M at October 3, 2020 and $179M at September 28, 2019; it concluded the earlier financial-statement misstatements were not material.
- Tyson initiated a sale process for a Prepared Foods business with an approximately $410M net carrying value, including about $350M of allocated goodwill. It expected to identify a buyer and close within 12 months, and anticipated a pretax gain.
- The prior-year comparison included a $110M pension termination gain in Q2 FY2020, while six-month FY2020 also included $52M of restructuring charges and $16M of net fire-related costs.
Outlook, risks and controls
Management expected pandemic-related challenges and inflation in labor, freight, materials and feed to continue through FY2021. It anticipated lower volumes through the year in Chicken and Prepared Foods; lower hatch rates could add Chicken costs. The company said liquidity should be sufficient to operate, invest, pay dividends and address debt maturities, but reserved the option to reduce or suspend buybacks or dividends if needed. It expected FY2021 net interest expense of approximately $420M. No specific full-year earnings guidance is provided in the filing text.
Key uncertainties include COVID-19 and workforce availability, severe weather, commodity and livestock costs, production throughput, export and supply-chain constraints, and extensive antitrust and other litigation. The company disclosed that disclosure controls were not effective as of April 3, 2021 because of a previously reported material weakness in controls over the existence and reconciliation of cattle held by third-party suppliers. Remediation was underway but had not yet been deemed complete.
Important facts for investors to verify
- Progress and final cost of the $320M Chicken legal accrual, including settlement approvals and opt-out claims.
- Effectiveness and testing of cattle-inventory control remediation, and any further revisions or findings.
- Whether COVID-19, labor constraints, hatch rates and higher input costs continue to depress volumes and segment margins.
- Execution, timing, proceeds and gain from the planned Prepared Foods business sale.
- Debt maturities, liquidity, covenant compliance, and actual capital spending versus the stated range.