Tyson Foods, Inc. — Q2 Fiscal 2017 Form 10-Q
Reporting period: Quarter and six months ended April 1, 2017. Amounts are in millions of dollars, except per-share data.
Business context and financial performance
Tyson operates four reportable segments: Beef, Pork, Chicken and Prepared Foods. Second-quarter sales fell 0.9% to $9,083, while six-month sales were down 0.3% to $18,265.
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Gross profit | $1,047 | $1,183 | $2,530 | $2,384 |
| Operating income | $571 | $704 | $1,553 | $1,480 |
| Net income attributable to Tyson | $340 | $432 | $933 | $893 |
| Diluted earnings per share | $0.92 | $1.10 | $2.51 | $2.25 |
| Operating margin | 6.3% | Not stated | Not stated | Not stated |
Second-quarter operating income declined 19%; six-month operating income increased 5%. Q2 gross profit decreased despite lower sales, while six-month gross profit improved. The six-month effective tax rate was 34.7%, versus 34.0% a year earlier.
Cash flow, debt and liquidity
- Six-month operating cash flow was $982, down from $1,105; investing cash outflow was $478, including $467 of capital expenditures. Financing cash outflow was $609.
- Cash and cash equivalents were $243 at quarter-end. Total debt was $6,448, including $543 current debt; net debt was $6,202. Net debt/EBITDA was 1.7x.
- Reported liquidity was approximately $985, including $243 cash, $3 short-term investments and $739 available under the revolving facility. The $500 commercial-paper program was fully drawn; commercial paper outstanding bore a weighted average rate of 1.27%.
- The company reported compliance with debt covenants. Current ratio was 1.62, down from 1.77 at October 1, 2016.
- Tyson repurchased $758 of shares and paid $158 in dividends during the six months. Management said it did not plan further program repurchases for the rest of fiscal 2017, except to fund equity-compensation obligations.
Material changes and segment trends
- Beef: Q2 operating income rose to $126 from $46, supported by more favorable market conditions and lower fed-cattle costs. Six-month operating income was $425 versus $117.
- Pork: Q2 operating income was broadly flat at $141; six-month income increased to $388 from $298. Management cited strong demand and export markets; margins were above normalized levels.
- Chicken: Q2 operating income fell to $233 from $347; six-month income fell to $496 from $705. Fires at two plants disrupted operations and added $23 of net costs; feed costs and operating expenses also pressured results.
- Prepared Foods: Q2 operating income fell to $87 from $197; six-month income fell to $277 from $404. Results included a $52 San Diego operation impairment, higher facility and marketing costs, and integration expenses, partly offset by synergies.
- Management reported $334 of synergies and profit-improvement initiatives realized in the first half, including $173 in Q2. It estimated fiscal 2017 Hillshire synergies and legacy Prepared Foods improvement would benefit results by approximately $675.
Outlook, unusual items and risks
- Management expected domestic protein production to increase approximately 3%–4% for fiscal 2017. Fiscal 2017 capital spending was expected to be approximately $1 billion, and net interest expense approximately $275, including assumptions about the proposed acquisition financing.
- Q2 results included a $52 impairment tied to a change in a co-manufacturing contract and ongoing San Diego losses. The quarter also reflected the chicken-plant fire disruption and commodity-derivative volatility. Six-month other expense included $16 of legal costs relating to a former Hillshire subsidiary’s 1995 plant closure.
- After quarter-end, Tyson announced plans to sell three non-protein businesses, with a combined net carrying value of approximately $800; management expected to complete sales within 12 months and anticipated a net gain.
- After quarter-end, Tyson agreed to acquire AdvancePierre for approximately $3.2 billion in cash and assume approximately $1.1 billion of gross debt. The deal was subject to tender-offer, regulatory and other conditions. Tyson arranged a $4.5 billion bridge-financing commitment; closing and financing outcomes were not assured.
- Material disclosed legal and regulatory matters include poultry-price and grower-compensation antitrust lawsuits, related securities litigation, and an early-stage SEC investigation that Tyson said it believed related to allegations concerning the Georgia Dock chicken-price index. Tyson also disclosed a Philippine labor matter with a recent award of approximately $296 million; the company stated it would appeal and had accrued a lower amount it considered probable and enforceable. Outcomes remain uncertain.
- Other risks cited include commodity and input-cost volatility, disease outbreaks, labor availability, food safety, customer concentration, foreign-market access, leverage, acquisitions and integration, litigation, and operational disruptions such as fires or severe weather.
Important facts for investors to verify
- Whether chicken operations recover from the plant fires, and the extent of any continuing costs or volume effects.
- Whether Prepared Foods improves after the San Diego impairment, and whether expected synergies are achieved without offsetting costs.
- Final terms, regulatory clearance, financing cost and integration results for the AdvancePierre acquisition; also the sale proceeds and gain on the non-protein businesses.
- Developments and potential financial exposure in poultry antitrust and related SEC matters, the Philippine labor case, and other disclosed litigation.
- Cash conversion, working-capital needs, capital spending and debt levels as the company funds its strategy and planned transactions.