Tyson Foods, Inc. — Q1 FY2016 Form 10-Q
Reporting period: Three months ended January 2, 2016; unaudited. Comparisons are with the three months ended December 27, 2014, unless otherwise noted. Tyson operates Chicken, Beef, Pork and Prepared Foods segments.
Financial performance
| Metric | Q1 FY2016 | Prior comparable quarter | Change / context |
|---|---|---|---|
| Sales | $9.152 billion | $10.817 billion | Down 15.4%; lower prices and divested operations were key factors |
| Gross profit | $1.201 billion | $956 million | Gross margin 13.1%, versus 8.8% |
| Operating income | $776 million | $509 million | Up 52%; operating margin 8.5%, versus 4.7% |
| Net income attributable to Tyson | $461 million | $309 million | Up approximately 49% |
| Diluted EPS | $1.15 | $0.74 | Up approximately 55% |
| Operating cash flow | $1.095 billion | $812 million | Working-capital changes contributed materially |
| Capital expenditures | $188 million | $231 million | Net cash from operations less capital expenditures was approximately $907 million |
| Cash and equivalents | $1.187 billion | $688 million at October 3, 2015 | Quarter-end balance includes cash associated with deferred supplier payments and upcoming debt retirement |
| Total debt | $6.705 billion | $6.725 billion at October 3, 2015 | Net debt was $5.516 billion; net debt/EBITDA was 1.7x, down from 2.1x at fiscal year-end |
Current assets were $5.677 billion and current liabilities $3.668 billion; the current ratio was 1.55. Shareholders’ equity totaled $9.777 billion. Declared quarterly dividends were $0.20 per Class A share and $0.18 per Class B share.
Segment results
| Segment | Sales | Operating income | Operating margin | Management’s explanation |
|---|---|---|---|---|
| Chicken | $2.636 billion | $358 million, up from $351 million | 13.6%, versus 12.6% | Improved execution and lower feed costs; management reported record results. |
| Beef | $3.614 billion | $71 million, versus a $6 million loss | 2.0%, versus negative 0.1% | Higher cattle availability reduced livestock costs; processing volume declined. |
| Pork | $1.213 billion | $158 million, up from $122 million | 13.0%, versus 7.9% | Higher hog supplies lowered costs, with favorable demand and plant utilization. |
| Prepared Foods | $1.896 billion | $207 million, up from $71 million | 10.9%, versus 3.3% | Synergies, product mix and lower input costs supported record operating income. |
| Other | $99 million | $18 million loss | Not stated | Includes foreign chicken operations and third-party merger and integration costs. |
Material changes and notable items
- Sales volume fell 6.8% and average sales price fell 9.2%. The company attributed most of the volume decline to the fiscal 2015 sales of its Brazil and Mexico chicken operations and the Heinold Hog Markets business; excluding those effects, company volume declined 1.1%.
- Lower input costs reduced cost of sales by approximately $1.3 billion year over year, led by lower cattle, hog, prepared-foods input and chicken feed costs. Reduced volume lowered costs by a further $573 million.
- Prepared Foods recorded $95 million of synergies in the quarter, including $40 million incremental to the prior-year quarter. Company-wide synergies and profit-improvement initiatives totaled $121 million.
- Fiscal 2015’s comparable quarter included $36 million of legacy Hillshire plant-fire costs, $19 million of Hillshire merger and integration costs, and a $26 million benefit from recognition of previously unrecognized tax benefits. These items affect comparability.
- The effective tax rate rose to 35.2% from 28.8%; the prior-year rate benefited from tax-reserve changes that reduced the rate by 6.5 percentage points.
- Tyson repurchased $387 million of Class A shares in the quarter. After quarter-end through February 4, 2016, it repurchased a further $221 million, or about 4.3 million shares; the board authorized an additional 50 million shares for repurchase.
Liquidity, outlook and risks
- Quarter-end liquidity was approximately $2.433 billion, comprising $1.187 billion cash, $2 million short-term investments and $1.244 billion available on the $1.25 billion revolving facility. The facility had no borrowings; $6 million of letters of credit were outstanding.
- Tyson planned to use available liquidity to retire $638 million of 6.60% notes due in April 2016. It expected fiscal 2016 net interest expense of approximately $245 million and capital spending of approximately $900 million.
- Management expected domestic protein production to increase 2%–3% for fiscal 2016 and anticipated moderate export-market growth. It cautioned that increased domestic availability and challenged export markets could pressure protein pricing.
- Management estimated Hillshire synergies and the legacy Prepared Foods profit-improvement plan would contribute more than $500 million in fiscal 2016 and more than $700 million in fiscal 2017, primarily in Prepared Foods. Some benefits would be reinvested in innovation, product launches and brands.
- Key operating exposures include volatile cattle, hog, feed and other input costs; commodity-derivative mark-to-market volatility; export-market access and foreign exchange; disease outbreaks, including avian influenza; food safety, labor and regulatory matters; customer demand and competition; and leverage and interest-rate risks. Avian influenza affected Prepared Foods turkey volumes.
- Material contingencies include employee wage-and-hour lawsuits, including the Bouaphakeo matter before the U.S. Supreme Court; a Philippines labor dispute; an EPA notice concerning California truck emissions; and an EPA criminal investigation related to a 2014 feed-supplement discharge in Missouri. The filing states that management believes it has defenses in relevant matters; outcomes remain uncertain.
- The company reported compliance with debt covenants and effective disclosure controls. It stated there were no material changes to the risk factors in its fiscal 2015 Form 10-K.
Important facts for investors to verify
- Whether strong segment profitability and the unusually high quarter’s cash generation persist after working-capital timing effects normalize.
- Progress toward the stated fiscal 2016 and fiscal 2017 synergy and profit-improvement targets, and the costs or reinvestment required to achieve them.
- Repayment of the $638 million notes due in April 2016 and the effect of continued share repurchases and dividends on liquidity and leverage.
- Changes in livestock and feed costs, protein prices, domestic supply, exports and avian-influenza impacts on segment margins and volumes.
- Developments, accruals or potential exposure in the wage-and-hour cases, Philippines dispute and environmental investigations.