Tyson Foods, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended October 3, 2020. Fiscal 2020 comprised 53 weeks, compared with 52 weeks in fiscal 2019. The filing also presents unaudited fourth-quarter results; it is an annual report, not a standalone quarterly filing. Unless noted, amounts are in U.S. dollars.
Business context
Tyson is a protein and food company operating Beef, Pork, Chicken and Prepared Foods segments, with international activities reported in International/Other. It sells branded and commodity products through retail, foodservice, international and industrial channels. Walmart accounted for 18.7% of FY2020 sales. COVID-19 materially affected operations, costs and the balance of demand between retail and foodservice.
Key financial metrics
| Metric | FY2020 | FY2019 |
|---|---|---|
| Sales | $43.185 billion | $42.405 billion |
| Gross profit | $5.384 billion | $5.022 billion |
| Operating income | $3.114 billion | $2.827 billion |
| Net income attributable to Tyson | $2.140 billion | $2.022 billion |
| Diluted earnings per share | $5.86 | $5.52 |
| Cash provided by operating activities | $3.874 billion | $2.513 billion |
| Capital expenditures | $1.199 billion | $1.259 billion |
| Cash and cash equivalents at year-end | $1.420 billion | $484 million |
| Total gross debt | $11.339 billion | $11.932 billion |
Gross margin was approximately 12.5% and operating margin 7.2% in FY2020. Net debt was $9.919 billion; net debt/EBITDA was 2.2x, down from 2.9x. The current ratio was 1.9x, versus 1.3x. Available liquidity was approximately $3.170 billion, including cash and revolving credit availability. The company reported $548 million of current debt and said it was in compliance with debt covenants.
FY2020 segment results: Beef sales were $15.742 billion and operating income $1.686 billion (10.7% margin); Pork, $5.128 billion and $565 million (11.0%); Chicken, $13.234 billion and $122 million (0.9%); Prepared Foods, $8.532 billion and $743 million (8.7%). International/Other had $1.856 billion in sales and a $2 million operating loss.
Fourth quarter, unaudited: Sales were $11.460 billion, operating income $1.012 billion, net income attributable to Tyson $692 million and diluted EPS $1.90. Comparable FY2019 fourth-quarter figures were $10.884 billion, $604 million, $369 million and $1.01, respectively. FY2020 Q4 included $23 million of restructuring charges and $65 million of income related to the extra fiscal week.
Material changes versus the prior comparable year
- Sales rose 1.8%; management attributed the increase to the additional week, higher average selling prices and acquired businesses. COVID-related lower production throughput reduced volumes.
- Operating income increased $287 million. Stronger Beef and Pork results more than offset lower Chicken and Prepared Foods operating income.
- Beef operating income increased $579 million and Pork increased $302 million, supported by strong demand, supply disruptions and lower livestock costs. Chicken operating income fell $499 million amid weaker market conditions, product mix and COVID-related production inefficiencies. Prepared Foods operating income fell $100 million, reflecting higher input costs and production disruption.
- Operating cash flow increased by $1.361 billion, including more favorable working-capital changes. Gross debt declined by $593 million, while cash increased by $936 million.
Outlook, management commentary, risks and unusual items
- Management expected COVID-19-related absenteeism, facility slowdowns, higher operating costs and foodservice weakness to continue into FY2021, with a negative effect on overall earnings. Retail volume gains had not fully offset foodservice declines. The duration and ultimate financial effects remained uncertain.
- Direct incremental COVID-19 expenses were approximately $540 million in FY2020, including worker availability and downtime, protective equipment, sanitation, testing and $114 million of frontline thank-you bonuses. This amount excludes indirect and market-related effects.
- Management expected FY2021 capital expenditures of approximately $1.2–$1.4 billion and net interest expense of approximately $440 million. It planned to pursue recovery of higher operating costs through pricing.
- The extended 2020 restructuring program was expected to generate savings of approximately $140 million in FY2021 and $160 million in FY2022; the company recorded $60 million of cumulative pretax charges for that program in FY2020. These are estimates, not guaranteed outcomes.
- The Board increased the quarterly Class A dividend to $0.445 per share and indicated an FY2021 annual rate of $1.78 per Class A share, a 6% increase from FY2020. Management cautioned that dividends or repurchases could be reduced or suspended if liquidity preservation became necessary.
- FY2020 included a $116 million pretax gain from pension plan terminations, $77 million in restructuring and related charges, and $65 million of income associated with the extra week. The effective tax rate was 22.4%, compared with 16.3% in FY2019; the prior year benefited from changes in tax reserves.
- Goodwill and indefinite-lived intangible assets totaled about $15.0 billion, approximately 43% of total assets. Management identified the Domestic Chicken and International reporting units as more sensitive to assumptions; the Chicken unit’s valuation had limited headroom under some scenarios. No material goodwill impairment was recorded.
- Material risks include COVID-19 and workforce availability, volatile livestock and feed costs, food safety and disease events, customer concentration, export and trade restrictions, cyber and ERP implementation risks, leverage and impairment risk. Walmart represented 18.7% of sales.
- Contingencies include poultry, pork, beef and turkey antitrust matters, wage-related litigation, environmental claims and claims related to COVID-19 infections. The company said it intended to defend material claims; for certain matters, potential losses beyond recorded accruals could not be reasonably estimated. The filing also describes DOJ cooperation under the Corporate Leniency Program in the broiler-chicken investigation.
Most important facts for investors to verify
- Whether COVID-related operating disruptions, worker costs and channel shifts persist, and whether pricing recovers those costs without weakening demand.
- Whether Beef and Pork’s unusually strong FY2020 margins are sustainable, and whether Chicken and Prepared Foods profitability recovers.
- Actual execution of the restructuring savings plan and FY2021 capital-spending outlook.
- Domestic Chicken and International goodwill assumptions, impairment headroom and sensitivity to margins and discount rates.
- Developments in antitrust, environmental, employment and COVID-related litigation, including any changes to estimated exposure or accruals.
- Debt maturities, refinancing access, liquidity, and the sustainability of dividends and repurchases under changing operating conditions.