TYSON FOODS, INC. OBJECTIVE
The following discussion provides an analysis of the Company's financial condition, cash flows and results of operations from management's perspective and should be read in conjunction with the consolidated condensed financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q and within the Company's Annual Report on Form 10-K filed for the fiscal year endedOctober 2, 2021 . Our objective is to also provide discussion of events and uncertainties known to management that are reasonably likely to cause reported financial information not to be indicative of future operating results or of future financial condition and to offer information that provides understanding of our financial condition, cash flows and results of operations. 22 --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Description of the Company We are one of the world's largest food companies and a recognized leader in protein. Founded in 1935 byJohn W. Tyson and grown under four generations of family leadership, the Company has a broad portfolio of products and brands like Tyson®, Jimmy Dean®, Hillshire Farm®, Ball Park®, Wright®, Aidells®, ibp® and State Fair®. Some of the key factors influencing our business are customer demand for our products; the ability to maintain and grow relationships with customers and introduce new and innovative products to the marketplace; accessibility of international markets; market prices for our products; the cost and availability of live cattle and hogs, raw materials and feed ingredients; availability of team members to operate our production facilities; and operating efficiencies of our facilities. We operate in four reportable segments: Beef, Pork, Chicken, andPrepared Foods . We measure segment profit as operating income (loss). International/Other primarily includes our foreign operations inAustralia ,China ,Malaysia ,Mexico ,the Netherlands ,South Korea andThailand , third-party merger and integration costs and corporate overhead related toTyson New Ventures, LLC .
Overview
COVID-19
We continue to proactively monitor and respond to the evolving nature of
the global novel coronavirus pandemic ("COVID-19" or "pandemic") and
its impact to our global business. Our ongoing COVID-19 task force was formed
for the primary purposes of maintaining the health and safety of our team
members, ensuring our ability to operate our processing facilities and
maintaining the liquidity of our business. We have experienced and continue
to experience multiple challenges related to the pandemic. The most significant
challenge we face is the availability of team members to operate our production
facilities as our production facilities continue to experience varying levels of
absenteeism. In the second quarter of fiscal 2022, we experienced an increase in
COVID-19 cases associated with the Omicron variant. The health and safety of our
team members remains our top priority, and we continue to provide a variety of
health and safety resources and services to team members and their family
members. Additionally, we have experienced some challenges in our supply chain
such as volatility of inputs, availability of shipping containers and port
congestion. These challenges impacted our operating costs, but generally, we
experienced lower direct incremental costs associated with COVID-19 in the first
six months of fiscal 2022 as compared to the same period in fiscal 2021, and we
expect this trend to continue throughout the remainder of fiscal 2022. For
fiscal 2022, we expect retail demand to remain elevated as compared to the
pre-pandemic levels and foodservice demand to continue to return to more
historic levels. However, the long-term impacts of COVID-19 remains uncertain
and will depend on future developments, including the duration and spread of the
pandemic, COVID-19 variants and resurgences, and related actions taken by
federal, state and local government officials to prevent and manage disease
spread, and effectively distribute and administer vaccinations, all of which
contain some level of uncertainty and cannot be easily predicted.
Strategy
Our strategy is to sustainably feed the world with the fastest growing protein brands. We intend to achieve our strategy as we: grow our business by delivering superior value to consumers and customers; deliver fuel for growth and returns through commercial, operational and financial excellence; and sustain our Company and our world for future generations. Beginning in fiscal 2022, we launched a new productivity program, which is designed to drive a better, faster and more agile organization that is supported by a culture of continuous improvement and faster decision making. The execution of this program will be supported by a program management office that will ensure delivery of key project milestones and report on savings achievements connected with the three pillars of the program. The first pillar is operational and functional excellence, which includes functional efficiency efforts in Finance, HR and Procurement focused on applying best practices to reduce costs. The second pillar is the use of new digital solutions like artificial intelligence and predictive analytics to drive efficiency in operations, supply chain planning, logistics and warehousing. The third pillar is automation, which will leverage automation and robotics technologies to automate difficult and higher turnover positions. We are targeting$1 billion in productivity savings by the end of fiscal 2024 and more than$400 million in fiscal 2022, relative to a fiscal 2021 cost baseline. We are currently on track to achieve our planned productivity savings for fiscal 2022. At this time, we do not anticipate costs associated with this program to be material.
General
Sales grew 16% and 20% in the second quarter and first six months of fiscal 2022, respectively, largely due to increased average sales prices across each of our segments and a$320 million legal contingency accrual recognized as a reduction to sales in the first quarter of fiscal 2021. The higher average sales prices were primarily due to the current inflationary environment and recovery of rapidly rising costs, such as labor, freight and transportation, livestock, feed ingredients and other input costs. Operating income of$1,156 million for the second quarter of fiscal 2022 was up 61% due to improved operating income in our Beef, Chicken, andPrepared Foods segments, partially offset by a decline in the results of our Pork segment. Operating income of$2,611 million for the first six months of fiscal 2022 was up 83% due to improved operating income in our Beef, Pork, and Chicken segments, partially offset by a decline in the results of ourPrepared Foods segment. In the second quarter of fiscal 2022, our operating income was impacted by$5 million of ongoing costs related to a fire in the fourth quarter of fiscal 2021 at one of our Chicken segment production facilities, net of insurance proceeds. In the six months endedApril 2, 2022 , our operating income was impacted by$18 million of insurance proceeds, net of costs, related to the same fire. In the six months endedApril 3, 2021 , our results were impacted by$19 million of charges related to the relocation of a production facility inChina . 23 -------------------------------------------------------------------------------- Market Environment According to theUnited States Department of Agriculture ("USDA"), domestic protein production (beef, pork, chicken and turkey) decreased less than 1% in the second quarter of fiscal 2022 compared to the same period in fiscal 2021. All segments experienced strong demand, challenging labor conditions and inflation in operating costs, especially in labor, freight and transportation and certain materials, and we expect these trends to continue through the remainder of fiscal 2022. Additionally, grain and feed ingredient costs have increased substantially, which impacts all of our segments. We pursue recovery of these increased costs through pricing. The Beef segment experienced strong global demand, sufficient supply of market-ready cattle and increased live cattle costs. The Pork segment experienced adequate supply of live hogs. The Chicken segment experienced strong demand and increased feed ingredient costs. Feed ingredient costs are expected to be higher for fiscal 2022 versus fiscal 2021.The Prepared Foods segment experienced increased costs largely due to the impacts of an inflationary environment. Additionally, the conflict betweenUkraine andRussia has led to economic sanctions againstRussia and certain regions ofUkraine andBelarus . As ofApril 2, 2022 , the impact of this conflict has not had a material direct impact on our financial performance. However, the conflict is still ongoing and there are many risks and uncertainties in relation to the conflict that are outside of our control. If the conflict escalates further or if additional countries join the conflict and additional economic sanctions are imposed, it could have a material impact on our business operations and financial performance.
Margins
Our total operating margin was 8.8% in the second quarter of fiscal 2022. Operating margins by segment were as follows:
•Beef - 12.7%
•Pork - 3.8%
•Chicken - 4.8%
•Prepared Foods - 11.0%
in millions, except per share data Three Months Ended Six Months Ended
April 2, 2022 April 3, 2021 April 2, 2022 April 3, 2021
Net income attributable to
$ 943
Net income attributable to Tyson - per 2.28 1.30
diluted share 5.35 2.58
Second quarter - Fiscal 2022 - Net income attributable to
•$5 million pretax, or (
Six months - Fiscal 2022 - Net income attributable to
•$40 million pretax, or
•$36 million post tax, or
Second quarter - Fiscal 2021 - Net income attributable to
•$19 million pretax, or (
Six months - Fiscal 2021 - Net income attributable to
•$320 million pretax, or (
•$6 million pretax, or
•$19 million pretax, or (
Summary of Results
Sales
in millions Three Months Ended Six Months Ended
April 2, 2022 April 3, 2021 April 2, 2022 April 3, 2021
Sales $ 13,117 $ 11,300 $ 26,050 $ 21,760
Change in sales volume (1.5) % (0.7) %
Change in average sales price 17.6 % 18.7 %
Sales growth 16.1 % 19.7 %
Second quarter - Fiscal 2022 vs Fiscal 2021
•Sales Volume - Sales were negatively impacted by a decrease in sales volume, which accounted for a decrease of$166 million , driven by decreased volumes in ourPork and Prepared Foods segments and impacts associated with the challenging labor environment and continued supply chain constraints, partially offset by slight increases in sales volume in our Beef and Chicken segments. 24 -------------------------------------------------------------------------------- •Average Sales Price - Sales were positively impacted by higher average sales prices, which accounted for an increase of$1,983 million . The increase in average sales price was primarily due to the current inflationary environment and recovery of rapidly rising costs.
Six months - Fiscal 2022 vs Fiscal 2021
•Sales Volume - Sales were negatively impacted by a decrease in sales volume, which accounted for a decrease of$130 million , driven by decreased volumes in our Beef,Pork and Prepared Foods segments and impacts associated with the challenging labor environment and continued supply chain constraints, partially offset by increases in sales volume in our Chicken segment. •Average Sales Price - Sales were positively impacted by higher average sales prices, which accounted for an increase of$4,100 million . The increase in average sales price was primarily due to the current inflationary environment and recovery of rapidly rising costs.
•The above change in average sales price for the first six months of fiscal 2022
excludes a
Cost of Sales
in millions Three Months Ended Six Months Ended
April 2, 2022 April 3,
2021
$ 11,382 $
10,047
$ 1,735 $
1,253
86.8 % 88.9 % 85.6 % 88.8 %
Second quarter - Fiscal 2022 vs Fiscal 2021
•Cost of sales increased$1,335 million . Lower sales volume decreased cost of sales$145 million while higher input cost per pound increased cost of sales$1,480 million .
•The
•Increase in live cattle costs of approximately
•Increase of approximately
•Increase in raw material and other input costs of approximately
•Increase in live hog costs of approximately
•Increase in freight and transportation costs of approximately
•Increase of approximately
•Increase of approximately
•Decrease due to net derivative gains of$86 million in the second quarter of fiscal 2022, compared to net derivative loss of$15 million in the second quarter of fiscal 2021 due to our risk management activities. These amounts exclude offsetting impacts from related physical purchase transactions, which are included in the change in live cattle and hog costs and raw material and feed ingredient costs described herein. •Remaining increase in costs across all of our segments primarily driven by net impacts on average cost per pound from mix changes as well as the impact of the inflationary environment on our labor and other input costs.
•The
Six months - Fiscal 2022 vs Fiscal 2021
•Cost of sales increased$2,970 million . Lower sales volume decreased cost of sales$114 million while higher input cost per pound increased cost of sales$3,084 million .
•The
?Increase in live cattle costs of approximately
•Increase of approximately
•Increase in raw material and other input costs of approximately
•Increase in live hog costs of approximately
•Increase in freight and transportation costs of approximately
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•Increase of approximately
•Decrease due to net derivative gains of$164 million in the first six months of fiscal 2022, compared to net derivative gains of$80 million in the first six months of fiscal 2021 due to our risk management activities. These amounts exclude offsetting impacts from related physical purchase transactions, which are included in the change in live cattle and hog costs and raw material and feed ingredient costs described herein.
•Decrease of approximately
•Remaining increase in costs across all of our segments primarily driven by net impacts on average cost per pound from mix changes as well as the impact of the inflationary environment on our labor and other input costs.
•The
Selling, General and Administrative
in millions Three Months Ended Six Months Ended
April 2, 2022 $ 533 $ 1,139 $ 1,005 As a percentage of sales 4.4 % 4.7 % 4.4 % 4.6 %
Second quarter - Fiscal 2022 vs Fiscal 2021
•Increase of
•Increase of
•Increase of
•Decrease of
•Remaining increase is primarily attributable to increased travel and entertainment costs, professional fees and increased donations.
Six months - Fiscal 2022 vs Fiscal 2021
•Increase of
•Increase of$55 million from the change in the impact of a cattle supplier's misappropriation of Company funds, as the result of a$55 million gain related to the recovery of cattle inventory in the six months endedApril 3, 2021 , as compared to no gain or loss recognized in the six months endedApril 2, 2022 .
•Increase of
•Increase of
•Increase of
•Increase of
•Decrease of
•Remaining increase is primarily attributable to increased travel and entertainment costs and increased donations.
Interest Expense
in millions Three Months Ended Six Months Ended
April 2, 2022 April 3, 2021 April 2, 2022 April 3, 2021
Cash interest expense $ 104 $ 113 $ 209 $ 227
Non-cash interest expense (7) (3) (12) (7)
Total interest expense $ 97 $ 110 $ 197 $ 220
Second quarter and six months - Fiscal 2022 vs Fiscal 2021
•Cash interest expense primarily included interest expense related to our senior notes, in addition to commitment fees incurred on our revolving credit facility. The decrease in cash interest expense in fiscal 2022 was primarily due to the redemption of senior notes in fiscal 2022 and repayments of term loans and the redemption of theAugust 2021 Notes in fiscal 2021. 26 --------------------------------------------------------------------------------
Other (Income) Expense, net
in millions Three Months Ended Six Months Ended
April 2, 2022 April 3, 2021 April 2, 2022 April 3, 2021
Total other (income) expense, net
$ (77) $ (31)
Second quarter and six months - Fiscal 2022 vs Fiscal 2021
•Included$22 million of production facilities fires insurance proceeds and$37 million of gains on equity investments due to observable price changes in the first six months of fiscal 2022.
Effective Tax Rate
Three Months Ended Six Months Ended
April 2, 2022 April 3, 2021 April 2, 2022 April 3, 2021
23.4 % 23.5 % 21.6 % 23.5 %
Second quarter and six months - Fiscal 2022 vs Fiscal 2021
•Our effective income tax rate was 23.4% for the second quarter of fiscal 2022 compared to 23.5% for the same period of fiscal 2021, and the effective income tax rates for the first six months of fiscal 2022 and 2021 were 21.6% and 23.5%, respectively. The effective tax rates for the second quarter and first six months of fiscal 2022 and 2021 were increased by state taxes and decreased by various tax benefits. Additionally, the effective tax rate for the first six months of fiscal 2022 includes a$36 million benefit from the remeasurement of deferred income taxes, primarily due to legislation decreasing state tax rates enacted in the first quarter. Segment Results We operate in four segments: Beef, Pork, Chicken, andPrepared Foods . The following table is a summary of sales and operating income (loss), which is how we measure segment profit. in millions Sales Three Months Ended Six Months Ended April 2, 2022 April 3, 2021 April 2, 2022 April 3, 2021 Beef$ 5,034 $ 4,046 $ 10,036 $ 8,033 Pork 1,565 1,477 3,191 2,916 Chicken 4,086 3,553 7,976 6,384 Prepared Foods 2,393 2,164 4,726 4,277 International/Other 565 487 1,115 956 Intersegment sales (526) (427) (994) (806) Total$ 13,117 $ 11,300 $ 26,050 $ 21,760 in millions
Operating Income (Loss)
Three Months Ended Six Months Ended
April 2, 2022 April 3, 2021 April 2, 2022 April 3, 2021
Beef $ 638 $ 445 $ 1,594 $ 973
Pork 59 67 223 183
Chicken 198 6 338 (210)
Prepared Foods 263 217 449 483
International/Other (2) (15) 7 (4)
Total $ 1,156 $ 720 $ 2,611 $ 1,425
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Beef Segment Results
in millions Three Months Ended Six Months Ended
April 2, 2022 April 3, 2021 Change April 2, 2022 April 3, 2021 Change
Sales $ 5,034 $ 4,046 $ 988 $ 10,036 $ 8,033 $ 2,003
Sales volume change 0.6 % (2.9) %
Average sales price
change 23.8 % 27.8 %
Operating income $ 638 $ 445 $ 193
12.7 % 11.0 % 15.9 % 12.1 %
Second quarter and six months - Fiscal 2022 vs Fiscal 2021
•Sales Volume - Sales volume was up slightly in the second quarter of fiscal 2022 driven by strong global demand, partially offset by a challenging labor environment and continued supply chain constraints. Sales volume decreased for the first six months due to the impacts associated with a challenging labor environment and increased supply chain constraints, partially offset by strong global demand. •Average Sales Price - Average sales price increased in the second quarter and the first six months of fiscal 2022 as input costs such as live cattle, labor, freight and transportation costs increased and demand for our beef products remained strong. •Operating Income - Operating income increased in the second quarter and first six months of fiscal 2022 due to strong demand as we continued to optimize revenues relative to live cattle supply and a reduction in direct incremental expenses related to COVID-19, partially offset by production inefficiencies due to the impacts associated with a challenging labor environment and continued supply chain constraints. Additionally, operating income in fiscal 2021 was impacted by a$55 million gain from the recovery of cattle inventory related to a cattle supplier's misappropriation of Company funds. Pork Segment Results in millions Three Months Ended Six Months Ended April 2, 2022 April 3, 2021 Change April 2, 2022 April 3, 2021 Change Sales$ 1,565 $ 1,477 $ 88 $ 3,191 $ 2,916 $ 275 Sales volume change (4.8) % (2.3) % Average sales price change 10.8 % 11.7 % Operating income $ 59 $ 67$ (8) $ 223 $ 183 $ 40 Operating margin 3.8 % 4.5 % 7.0 % 6.3 %
Second quarter and six months - Fiscal 2022 vs Fiscal 2021
•Sales Volume - Sales volume decreased in the second quarter and first six
months of fiscal 2022 primarily due to the impacts associated with a challenging
labor environment.
•Average Sales Price - Average sales price increased in the second quarter and
first six months of fiscal 2022 as input costs such as live hogs, labor, freight
and transportation costs increased, partially offset by unfavorable mix
associated with labor shortages.
•Operating Income - Operating income decreased slightly in the second quarter of
fiscal 2022 due to higher input costs such as live hogs, labor and freight and
transportation costs. Operating income for the first six months of fiscal 2022
increased as we optimized revenues relative to live hog supply and due to a
reduction in direct incremental expenses related to COVID-19, partially offset
by higher inputs costs and the impacts associated with a challenging labor
environment.
Chicken Segment Results
in millions Three Months Ended Six Months Ended
April 2, 2022 April 3, 2021 Change April 2, 2022 April 3, 2021 Change
Sales $ 4,086 $ 3,553 $ 533 $ 7,976 $ 6,384 $ 1,592
Sales volume change 0.6 % 2.1 %
Average sales price
change 14.4 % 16.9 %
Operating income (loss) $ 198 $ 6 $ 192 $ 338 $ (210) $ 548
Operating margin 4.8 % 0.2 % 4.2 % (3.3) %
Second quarter and six months - Fiscal 2022 vs Fiscal 2021
•Sales Volume - Sales volume increased in the second quarter and first six
months of fiscal 2022 primarily due to a strong demand environment partially
offset by continued supply chain constraints.
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•Average Sales Price - Average sales price increased in the second quarter and
first six months of fiscal 2022 due to the effects of pricing initiatives in an
inflationary cost environment.
•Operating Income (Loss) - Operating income increased in the second quarter and
first six months of fiscal 2022 due to increased sales volume and higher average
sales prices, partially offset by the impacts of inflationary market conditions
including increased supply chain costs and a challenging labor environment. In
the second quarter of fiscal 2022, we experienced $100 million of higher feed
ingredient costs and $101 million of net derivative gains as compared to $10
million of net derivative gains in the second quarter of fiscal 2021. In the
first six months of fiscal 2022, we experienced $285 million of higher feed
ingredient costs and $159 million of net derivative gains as compared to $83
million of net derivative gains in the first six months of fiscal 2021.
Additionally, operating income in the first six months of fiscal 2022 was
impacted by $18 million of insurance proceeds, net of costs incurred related to
a fire at a production facility and was impacted in the first quarter of fiscal
2021 by a $320 million loss from the recognition of a legal contingency accrual.
Prepared Foods Segment Results
in millions Three Months Ended Six Months Ended
April 2, 2022 April 3, 2021 Change April 2, 2022 April 3, 2021 Change
Sales $ 2,393 $ 2,164 $ 229 $ 4,726 $ 4,277 $ 449
Sales volume change (5.3) % (4.0) %
Average sales price
change 15.9 % 14.5 %
Operating income $ 263 $ 217 $ 46 $ 449 $ 483 $ (34)
Operating margin 11.0 % 10.0 % 9.5 % 11.3 %
Second quarter and six months - Fiscal 2022 vs Fiscal 2021
•Sales Volume - Sales volume decreased in the second quarter and first six months of fiscal 2022 due to lower production throughput primarily associated with a challenging labor and supply environment, uneven foodservice recovery and the divestiture of our pet treats business in the fourth quarter of fiscal 2021.
•Average Sales Price - Average sales price increased in the second quarter and first six months of fiscal 2022 primarily due to the effects of revenue management in an inflationary cost environment and favorable product mix.
•Operating Income - Operating income increased in the second quarter of fiscal 2022 due to higher average sales prices, partially offset by the impacts of inflationary market conditions, including$210 million of increased raw materials and other input costs, increased supply chain costs and a challenging labor environment. Operating income decreased in the first six months of fiscal 2022 due to the impacts of inflationary market conditions, including$425 million of increased raw materials and other input costs, increased supply chain costs and a challenging labor environment, partially offset by higher average sales prices. International/Other Results in millions Three Months Ended Six Months Ended April 2, 2022 April 3, 2021 Change April 2, 2022 April 3, 2021 Change Sales$ 565 $ 487$ 78 $ 1,115 $ 956$ 159 Operating income (loss) (2) (15) 13 $ 7 $ (4)$ 11
Second quarter and six months - Fiscal 2022 vs Fiscal 2021
•Sales - Sales increased in the second quarter and first six months of fiscal 2022 primarily due to increased pricing from favorable product mix and increased volume. •Operating Income (Loss) - Operating income increased in the second quarter and first six months of fiscal 2022 primarily due to a$19 million charge incurred in the second quarter of fiscal 2021 related to the relocation of a production facility inChina , partially offset by increased advertising and promotional investments as well as increased raw material and other input costs.
LIQUIDITY AND CAPITAL RESOURCES
Our cash needs for working capital, capital expenditures, growth opportunities,
repurchases of senior notes, repayment of maturing debt, the payment of
dividends and share repurchases are expected to be met with current cash on
hand, cash flows provided by operating activities or short-term borrowings.
Based on our current expectations, we believe our liquidity and capital
resources will be sufficient to operate our business. However, we may take
advantage of opportunities to generate additional liquidity or refinance
existing debt through capital market transactions. The amount, nature and timing
of any capital market transactions will depend on our operating performance and
other circumstances; our then-current commitments and obligations; the amount,
nature and timing of our capital requirements; any limitations imposed by our
current credit arrangements; and overall market conditions.
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