Tyson Foods, Inc. — Q3 FY2023 Form 10-Q
Reporting period: Quarter and first nine months ended July 1, 2023; comparisons are to the periods ended July 2, 2022. Amounts are in U.S. dollars. Tyson operates Beef, Pork, Chicken and Prepared Foods segments; International/Other is also reported.
Financial performance
| Metric | Q3 FY2023 | Q3 FY2022 | Nine months FY2023 | Nine months FY2022 |
|---|---|---|---|---|
| Sales | $13.140 billion | $13.495 billion | $39.533 billion | $39.545 billion |
| Gross profit | $677 million | $1.611 billion | $2.172 billion | $5.361 billion |
| Operating income (loss) | $(350) million | $1.033 billion | $68 million | $3.644 billion |
| Net income (loss) attributable to Tyson | $(417) million | $750 million | $(198) million | $2.700 billion |
| Diluted EPS | $(1.18) | $2.07 | $(0.56) | $7.42 |
| Cash provided by operating activities | Not presented for quarter | $1.429 billion | $1.890 billion |
Q3 gross margin was approximately 5.2%, compared with 11.9% a year earlier; operating margin was (2.7)%. For the nine-month periods, gross margin was approximately 5.5% versus 13.6%, and operating margin was approximately 0.2% versus 9.2%.
- Segment operating income (loss), Q3: Beef $66 million (prior year $533 million); Pork $(74) million ($25 million); Chicken $(314) million ($277 million); Prepared Foods $206 million ($186 million); International/Other $(234) million ($12 million).
- Balance sheet at July 1: Cash $699 million; current assets $8.883 billion; current liabilities $4.948 billion; current ratio 1.8x. Total debt was $9.320 billion, including $457 million current and $8.863 billion long-term. Net debt was $8.614 billion, and net debt/EBITDA was 4.1x, up from 1.3x at October 1, 2022.
- Cash and investment: Nine-month operating cash flow was $1.429 billion. Capital expenditures were $1.564 billion; investing cash use was $1.872 billion. Cash declined by $332 million from fiscal year-end. The company reported total liquidity of $3.706 billion, including cash, short-term investments and available credit facilities.
Changes and key drivers
- Q3 sales fell 3%; lower average selling prices reduced sales by $364 million, partly offset by a $47 million increase from volume. Nine-month sales were nearly flat, as higher volume was largely offset by lower prices.
- Operating results deteriorated sharply across Beef, Pork and Chicken, while Prepared Foods improved. Beef faced reduced cattle supply and higher cattle costs; Pork faced weaker export demand and compressed margins; Chicken faced excess domestic supply, input-cost pressure and operating challenges. Prepared Foods benefited from lower raw-material costs in Q3.
- Cost of sales rose $579 million in Q3 and $3.177 billion for the nine months. Management cited higher live-cattle costs, inflation in labor and other inputs, inventory valuation adjustments and derivative losses. Lower hog, Prepared Foods raw-material, freight and transportation costs partly offset the increases.
- Goodwill impairment charges of $448 million were recorded in Q3: $210 million in Chicken and $238 million in International/Other. The assessment followed weaker-than-expected results, changing market conditions and market capitalization falling below book value.
Outlook, risks and unusual items
- Management forecast fiscal 2023 capital spending of approximately $2.1 billion and net interest expense of approximately $340 million. It said liquidity and capital resources should be sufficient for operations. The filing provides no specific earnings or revenue guidance.
- In August 2023, Tyson approved closure of four Chicken processing facilities, with operations expected to cease in the first two fiscal quarters of 2024. It estimated pretax costs of $300 million to $400 million, primarily for contract terminations, impairments, accelerated depreciation, severance and retention. Production is to be consolidated at other facilities; customers and consumers were not expected to be affected.
- Additional goodwill impairment is a material risk. Several Chicken, Beef and Pork reporting units had estimated fair values less than 20% above carrying value; management noted that modest adverse changes in discount rates or failure to achieve projected margins could lead to further impairment.
- Legal matters include ongoing broiler, pork, beef and wage-related antitrust litigation and investigations. The broiler class settlements totaled $221.5 million; a $38 million additional charge was recorded in the first nine months, and the related accrual was $149 million at July 1. A first trial involving certain broiler claims was scheduled for September 2023. Tyson reported conditional DOJ leniency for specified self-reported matters, subject to continued cooperation.
- Tyson is contesting a Mexican tax assessment of approximately $496 million and has recorded no liability for it. The company also disclosed an Oklahoma environmental case in which the court ruled for the state on findings of fact and conclusions of law; the parties were directed to pursue mediation on remedies.
- Other risks include volatile livestock and feed costs, protein supply and pricing, labor availability, interest rates, foreign-market access, animal disease, food safety, climate and regulatory developments, and litigation. Tyson was in compliance with debt covenants at July 1.
Investor verification priorities
- Track segment-level operating performance, particularly whether Chicken and Beef margins recover and whether Pork remains loss-making.
- Assess goodwill valuation assumptions and the risk of further impairments, especially for Chicken, Beef and Pork reporting units.
- Verify the final cost, timing and operational effects of the four announced Chicken facility closures.
- Monitor debt, interest expense, liquidity and leverage: reported net debt/EBITDA rose to 4.1x, while cash flow was below capital expenditures for the nine-month period.
- Follow outcomes and accrual changes in antitrust, tax and environmental matters, including the broiler litigation and the Mexican assessment.