Tyson Foods, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2018; comparisons are with the periods ended July 1, 2017. Amounts are in U.S. dollars.
Business context
Tyson operates Beef, Pork, Chicken and Prepared Foods segments. Its strategy emphasizes protein brands and value-added products. Results this quarter reflected record Beef performance and continued strength in Prepared Foods, offset in part by weaker Pork and Chicken margins.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Sales | $10.051 billion | $9.850 billion | $30.053 billion | $28.115 billion |
| Operating income | $802 million | $697 million | $2.227 billion | $2.250 billion |
| Net income attributable to Tyson | $541 million | $447 million | $2.487 billion | $1.380 billion |
| Diluted EPS | $1.47 | $1.21 | $6.72 | $3.72 |
| Operating margin | 8.0% | 7.1% | 7.4% | 8.0% |
Q3 sales increased 2.0%, operating income rose 15%, and Tyson-attributable net income rose 21%. Nine-month sales grew 6.9%, while operating income was slightly lower year over year. Nine-month net income and EPS were substantially boosted by a $1.004 billion tax benefit from remeasurement of deferred tax liabilities under the Tax Act; the filing reports a nine-month effective tax rate of negative 25.3%.
Cash flow and investment: Nine-month operating cash flow was $1.924 billion, compared with $1.449 billion. Capital expenditures were $887 million; operating cash flow less capital expenditures was approximately $1.037 billion. Investing activities used $1.423 billion, including $608 million for acquisitions. Cash declined to $170 million from $318 million at September 30, 2017.
Debt and liquidity: Total debt was $10.160 billion, including $1.308 billion current debt; long-term debt was $8.852 billion. Net debt was $9.986 billion and net debt/EBITDA was 2.6x. Reported liquidity was $894 million, including cash, short-term investments and revolving-credit availability net of commercial paper. The current ratio was 1.48. Tyson said it was in compliance with debt covenants.
Material changes and segment performance
- Beef: Q3 operating income increased to $318 million from $147 million, with margin rising to 8.0%; stronger demand, exports and cattle availability supported results.
- Pork: Q3 operating income fell to $67 million from $136 million, with margin declining to 5.6%, amid excess domestic supply and higher labor and freight costs.
- Chicken: Q3 operating income fell to $189 million from $294 million, with margin declining to 6.4%; higher feed, growout, labor and freight costs and weaker demand weighed on performance.
- Prepared Foods: Q3 operating income increased to $243 million from $174 million, with margin rising to 11.4%, supported by improved mix, acquisitions and cost savings.
- AdvancePierre contributed incremental sales during the year-over-year comparison period. Tyson acquired Tecumseh Poultry for $382 million in June. The company expected to acquire American Proteins for approximately $850 million, subject to closing conditions.
Outlook, commentary and risks
- Management expected domestic protein production to increase approximately 3% for fiscal 2018. It cited trade and tariff uncertainty affecting domestic and export prices, particularly for Chicken and Pork, and expected higher freight and labor costs to continue through the fiscal year. Tyson planned to pursue cost recovery through pricing.
- Fiscal 2018 outlook included capital spending of approximately $1.2–$1.3 billion, net interest expense of approximately $345 million, and an effective tax rate of approximately negative 9%; management expected a 24% effective tax rate in fiscal 2019.
- The Financial Fitness Program had delivered $168 million in savings in the first nine months. Management estimated cumulative net savings of more than $200 million in fiscal 2018, $400 million in fiscal 2019 and $600 million in fiscal 2020. Estimated total pretax program charges were $253 million, of which $195 million had been recognized.
- Tyson recorded $109 million of one-time frontline employee bonuses and $101 million of impairment charges related to planned divestitures during the first nine months. The Kettle business sale generated $125 million net proceeds and a $22 million pretax gain. Sara Lee Frozen Bakery and Van’s sold for approximately $615 million; the transaction closed July 30, 2018, after quarter-end. A pizza-crust business sale was expected in fiscal Q4.
- Material contingencies include poultry and pork antitrust class actions, a poultry-grower antitrust case, a Philippines labor award under appeal, and an asbestos verdict of approximately $13 million being appealed. The filing states that Tyson maintains an accrual for the Philippines matter; potential outcomes and ultimate exposure remain uncertain.
- Other stated risks include volatility in livestock, feed and other input costs; tariffs and access to export markets; labor availability and costs; food safety; acquisition integration; leverage and interest rates; litigation; and operational or technology disruptions. Management reported disclosure controls were effective at June 30, 2018.
Important facts for investors to verify
- How much of reported nine-month earnings growth reflects the one-time deferred-tax remeasurement rather than operating performance.
- Whether Chicken and Pork margins recover amid supply, demand, feed-cost, freight, labor and tariff pressures.
- Progress and realized savings from the Financial Fitness Program, including remaining charges and execution of its savings targets.
- Final proceeds and financial effects of the divestitures, and the closing, financing and integration outcomes for announced acquisitions.
- Changes in debt, commercial-paper use, liquidity and net leverage, alongside planned capital spending and shareholder returns.
- Developments, accrual adequacy and potential financial exposure in the disclosed litigation and other contingencies.