Tyson Foods, Inc. — Fiscal 2017 First-Quarter 10-Q
Business context and reporting period. Tyson is a protein and prepared-foods producer operating through Chicken, Beef, Pork and Prepared Foods segments. This unaudited quarter ended December 31, 2016, compared with the three months ended January 2, 2016. Amounts below are in U.S. dollars; financial figures are in millions unless stated otherwise.
Key financial metrics
| Metric | Q1 FY2017 | Prior-year quarter | Change |
|---|---|---|---|
| Sales | $9,182 | $9,152 | Up 0.3%; volume up 2.4%, average price down 2.0% |
| Gross profit | $1,483 | $1,201 | Up $282; gross margin approximately 16.2% vs. 13.1% |
| Operating income | $982 | $776 | Up 27%; operating margin 10.7% |
| Net income attributable to Tyson | $593 | $461 | Up 29% |
| Diluted EPS | $1.59 | $1.15 | Up 38% |
| Operating cash flow | $1,134 | $1,095 | Up $39 |
| Capital expenditures | $200 | $188 | Up $12 |
| Total debt at quarter-end | $5,967 | $6,279 at Oct. 1, 2016 | Down $312 from fiscal year-end |
| Cash and short-term investments | $311 | $353 at Oct. 1, 2016 | Down $42 |
Cash flow from operations exceeded net income, with working-capital movements contributing $360 million. Financing used $957 million, including $576 million of Class A share repurchases and $79 million of dividends. Quarterly dividends declared rose to $0.30 per Class A share and $0.27 per Class B share, from $0.20 and $0.18, respectively.
At December 31, total current assets were $4,742 million and current liabilities were $2,972 million; the current ratio was 1.60, down from 1.77 at October 1. Net debt was $5,656 million and net debt/EBITDA was 1.5x, compared with 1.7x at fiscal year-end. The company reported $1,554 million of total liquidity, including $307 million cash and $1,243 million available under its $1.25 billion revolving facility. It was in compliance with debt covenants.
Material changes versus the prior-year quarter
- Beef operating income rose $228 million to $299 million, and Pork rose $89 million to $247 million, both record segment earnings. Lower livestock costs, stronger demand and improved export markets supported results.
- Chicken operating income fell $95 million to $263 million; higher marketing and operating costs, including integration-related compensation expense, outweighed lower feed costs and improved sales mix.
- Prepared Foods operating income declined $17 million to $190 million. Higher facility and marketing costs offset increased volume, lower input costs and synergy benefits.
- SG&A increased $76 million to $501 million, including higher employee costs, marketing, severance and professional and IT costs. The quarter also included $16 million of legal costs related to a former Hillshire Brands subsidiary’s 1995 plant closure.
- Gross-profit improvement reflected lower input costs, especially cattle, hog and Prepared Foods inputs, partly offset by higher volume and operating costs. Management reported $58 million of incremental compensation and benefit integration expense across the business.
Outlook, management commentary and risks
- Management expected domestic protein production to increase 2–3% for fiscal 2017. Fiscal 2017 capital spending was expected to be approximately $1 billion; estimated net interest expense was approximately $230 million.
- Management estimated fiscal 2017 Hillshire Brands synergies and legacy Prepared Foods profit-improvement benefits of approximately $675 million. The company reported $161 million of synergies and profit-improvement initiatives realized in Q1, including $40 million incremental versus the prior-year quarter.
- Management said available cash, operating cash flow and borrowing capacity should be sufficient for expected needs, while noting that capital-market transactions could be used depending on circumstances.
- Key operating risks include volatility in livestock, feed and other input costs; protein prices and supply; export-market access, foreign exchange and trade restrictions; disease outbreaks; labor availability; food safety; customer demand and competition; leverage and interest rates; and adverse litigation or regulatory outcomes.
- Tyson disclosed poultry-industry antitrust class actions alleging price coordination and manipulation of a broiler-price index. It also received an SEC subpoena on January 20, 2017, relating to an investigation believed to concern those allegations; the company said it was cooperating and the investigation was at an early stage. A separate shareholder class action alleged misleading disclosures.
- In a Philippine labor matter involving a former Hillshire Brands subsidiary, the labor commission issued an award of approximately $299 million for most complainants. Tyson filed motions for reconsideration and said its recorded accrual was below the award; the amount of the accrual is not stated clearly in this filing. The ultimate enforceable loss remained uncertain and could be material if the accrual proved inadequate.
- Other disclosed matters included a new poultry-grower compensation antitrust suit filed January 27, 2017, and an EPA criminal investigation concerning a 2014 wastewater incident. The company said it could not predict the outcome of the EPA investigation.
Most important facts for investors to verify
- Whether strong Beef and Pork margins are sustainable as livestock supply, commodity costs, demand and export conditions change.
- Progress toward the approximately $675 million fiscal-year synergy and profit-improvement estimate, and the costs required to achieve it.
- The size and potential financial impact of the Philippine labor accrual and the resolution of poultry antitrust, shareholder and grower litigation, including the SEC investigation.
- Whether forecast capital spending, continued repurchases and dividends remain consistent with liquidity, debt reduction and operating cash generation.
- The source and durability of quarterly cash flow, given the material contribution from working-capital movements.