Tyson Foods, Inc. — Q2 fiscal 2018 Form 10-Q
Reporting period: Three and six months ended March 31, 2018; comparisons are to the periods ended April 1, 2017. Amounts are in millions except per-share data.
Business context and results
Tyson operates Beef, Pork, Chicken and Prepared Foods segments. Quarterly sales growth reflected stronger demand for beef and chicken, higher average selling prices and the contribution from the AdvancePierre acquisition. Management said domestic protein production increased about 2% in the quarter and expected it to rise about 3% for fiscal 2018.
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Sales | $9,773 | $9,083 | $20,002 | $18,265 |
| Gross profit | $1,020 | $1,047 | $2,471 | $2,530 |
| Operating income | $498 | $571 | $1,425 | $1,553 |
| Income attributable to Tyson | $315 | $340 | $1,946 | $933 |
| Diluted EPS | $0.85 | $0.92 | $5.25 | $2.51 |
| Operating margin | 5.1% | 6.3% | 7.1% | 8.5% |
Financial position, cash flow and liquidity
- Six-month operating cash flow was $1,139, versus $982 in the prior-year period. Investing activities used $686 and financing activities used $576. Cash declined $120 from fiscal year-end to $198.
- Capital expenditures were $559 for the six months; management expected fiscal 2018 capital spending of approximately $1.3 billion.
- Total debt was $10,000 at March 31, 2018, down from $10,203 at September 30, 2017. Cash and short-term investments totaled $200; reported net debt was $9,800 and net debt/EBITDA was 2.7x.
- Current debt was $1,128; cash and current assets were $5,990, against current liabilities of $3,838. The current ratio was 1.56. Reported total liquidity was approximately $950, including $198 cash and availability under the $1.75 billion revolving facility, net of $1 billion commercial paper outstanding.
- Interest expense rose to $86 in the quarter and $174 for six months, principally reflecting debt issued for the AdvancePierre acquisition. Management expected fiscal 2018 net interest expense of approximately $340.
- Class A and Class B dividends declared in Q2 were $0.300 and $0.270 per share, respectively. Six-month dividends paid were $216.
Material changes and segment performance
- Quarterly sales increased 7.6%; six-month sales increased 9.5%. AdvancePierre contributed $403 of quarterly and $799 of six-month sales compared with the prior-year periods.
- Quarterly operating income decreased 12.8%, with declines in Beef and Pork and a slight decline in Chicken partly offset by Prepared Foods. Six-month operating income decreased 8.2%.
- Q2 segment operating income: Beef $92 (down from $126); Pork $67 (down from $141); Chicken $231 (down from $233); Prepared Foods $123 (up from $87). Prepared Foods includes a $75 impairment charge related to planned divestitures.
- Higher cattle and hog costs, labor and freight expenses, and a $109 one-time frontline employee bonus weighed on results. Prepared Foods also faced higher input costs; management cited improved demand for retail products but weaker foodservice demand.
- Six-month net income was substantially affected by a $1,003 tax benefit from remeasuring deferred tax liabilities after U.S. tax reform. The six-month effective tax rate was negative 54.0%, versus 34.7% a year earlier; therefore, the reported earnings increase is not a like-for-like indication of operating performance.
Outlook, management commentary and risks
- Management expected a fiscal 2018 effective tax rate of approximately negative 7.5%, followed by approximately 25% in fiscal 2019. Tax Act accounting remained provisional; the company had not estimated the impact of GILTI.
- The Financial Fitness Program was expected to generate cumulative net savings of $200 in fiscal 2018, $400 in fiscal 2019 and $600 in fiscal 2020. Tyson reported $102 of savings in the first six months. Estimated cumulative pretax program charges rose to $253, with $181 recognized; approximately 550 positions were expected to be eliminated.
- Management expected increased freight and labor costs to continue through fiscal 2018 and intended to pursue recovery through pricing. Trade and tariff activity could affect exports and input costs. The company also identified commodity prices, livestock disease, labor availability, food safety, acquisition integration, leverage, litigation and foreign-market access among important risks.
- Tyson completed the sale of its Kettle business for $125 net proceeds and recorded a $22 pretax gain. It expected to close sales of Sara Lee Frozen Bakery, Van’s and pizza crust businesses in the second half of fiscal 2018; the remaining held-for-sale businesses had a $634 net carrying value at quarter-end.
- Material legal matters include poultry price-fixing and grower-compensation litigation, as well as other claims. A Philippine labor award was vacated by the Court of Appeals but remained subject to appeal; Tyson continued to maintain an accrual. The company appealed a roughly $13 million asbestos verdict. Management said risk factors were materially unchanged from its prior annual report.
Important facts for investors to verify
- Underlying segment profitability and margins after separating the tax benefit, frontline bonus, divestiture impairment and restructuring charges.
- Progress and final proceeds from the planned non-protein business sales, and any further impairment charges.
- Realization of Financial Fitness savings, remaining implementation costs and workforce reductions.
- Debt repayment, commercial paper needs, the 2.7x net debt/EBITDA measure and planned resumption of share repurchases as leverage approaches the company’s target.
- Resolution and potential financial exposure from poultry antitrust, grower, Philippine labor, asbestos and other legal proceedings.