Tyson Foods, Inc. — FY2012 Form 10-K
Reporting period: Fiscal year ended September 29, 2012 (52 weeks). This annual filing also reports fourth-quarter results; fiscal 2012 Q4 ended September 29, 2012. Tyson produces chicken, beef, pork and prepared foods through four operating segments.
Financial performance
| Metric | FY2012 | FY2011 |
|---|---|---|
| Sales | $33.278 billion | $32.266 billion |
| Gross profit / gross margin | $2.160 billion / 6.5% | $2.199 billion / 6.8% |
| Operating income / operating margin | $1.248 billion / 3.8% | $1.285 billion / 4.0% |
| Net income attributable to Tyson | $583 million | $750 million |
| Diluted EPS attributable to Tyson | $1.58 | $1.97 |
| Operating cash flow | $1.187 billion | $1.046 billion |
| Capital expenditures | $690 million | $643 million |
| Cash and cash equivalents | $1.071 billion | $716 million |
| Total debt | $2.432 billion | $2.182 billion |
| Debt to capitalization | 28.7% | 27.7% |
Sales rose 3.1%, as average selling prices increased 7.7%, offset by a 4.3% decline in volume. Higher input costs per pound added about $2.2 billion to cost of sales, led by approximately $1.5 billion of higher cattle and hog costs and $320 million of higher chicken feed costs. Management reported $1.2 billion of total liquidity, including cash and available revolving-credit capacity; the detailed liquidity table gives $2.033 billion, including $962 million available under the facility. Current ratio was 1.91.
Segment operating income and margins were: Chicken $446 million (3.8%); Beef $218 million (1.6%); Pork $417 million (7.6%); Prepared Foods $181 million (5.6%); and Other loss of $14 million. Chicken and Prepared Foods improved year over year, while Beef and Pork declined. Chicken benefited from reduced domestic supply and operating improvements; Beef faced high cattle costs and weaker demand periods; Pork margins were compressed by increased domestic availability; Prepared Foods benefited from lower raw-material costs and higher pricing.
Fourth quarter: Sales were $8.373 billion versus $8.404 billion a year earlier; operating income was $332 million versus $172 million; net income attributable to Tyson was $185 million versus $97 million. FY2012 Q3 included the $167 million pretax debt-extinguishment charge; Q4 included a $15 million non-cash impairment charge related to non-core China assets.
Material changes, financing and liquidity
- Net income attributable to Tyson fell 22% year over year despite higher sales, reflecting lower operating income and increased interest expense, including a $167 million charge for early debt retirement.
- Tyson issued $1.0 billion of 4.50% senior notes due 2022 and retired its 10.50% notes due 2014. Management estimated annualized interest savings of about $55 million.
- Operating cash flow increased to $1.187 billion. Investing cash outflow was $660 million, mainly reflecting $690 million of capital spending. Financing cash outflow was $171 million, including $264 million for share purchases and $57 million of dividends.
- Debt included $458 million of 3.25% convertible notes due October 2013, classified as current; the company said it expected to use cash and/or operating cash flow for repayment of amounts not converted. The $1.0 billion revolving facility matures in August 2017, and no amount was borrowed at year-end. The company reported compliance with debt covenants.
Outlook, risks and contingencies
- For FY2013, management forecast sales of approximately $35 billion, capital expenditures of about $550 million and net interest expense of approximately $140 million. It expected overall domestic protein production to fall 2% and anticipated higher prices, but warned that drought-related grain costs would raise chicken input costs by about $600 million.
- Management expected Chicken to remain profitable but potentially below its normalized 5%–7% margin range; Beef profitable but potentially below 2.5%–4.5%; Pork in or above 6%–8%; and Prepared Foods within 4%–6%.
- Key exposures include volatile grain, livestock and energy costs; the ability to pass input inflation through to customers; disease outbreaks, food safety incidents and recalls; international trade, currency and political risks; labor availability and relations; customer concentration; leverage; and derivative-market volatility. Wal-Mart represented 13.8% of FY2012 sales and 17.1% of year-end net receivables.
- Foreign Chicken start-up operations in Brazil and China incurred approximately $105 million of FY2012 operating losses, including the $15 million impairment. Dynamic Fuels, a consolidated 50/50 joint venture, reported a $14 million operating loss and faced mechanical, pretreatment and hydrogen-supply issues; further asset impairment could result if performance does not improve or economics become unattractive.
- Material legal matters include Oklahoma’s environmental lawsuit concerning poultry-litter application in the Illinois River watershed, with claims narrowed but injunctive relief still at issue; the filing describes requested damages exceeding $800 million in the original complaint. EPA/DOJ discussions concerning alleged Clean Air Act Risk Management Plan issues at 25 facilities were ongoing, with potential penalties and required facility changes. Wage-and-hour cases had mixed outcomes, including adverse jury verdicts under appeal and favorable judgments.
- After year-end, the board declared a $0.10-per-share special dividend on Class A stock ($0.09 on Class B) and increased the quarterly dividend by 25%.
Important facts for investors to verify
- Whether FY2013 grain inflation and expected protein-price increases preserve segment margins, especially in Chicken and Beef.
- Repayment, conversion or refinancing of the $458 million convertible notes due October 2013, and realization of projected interest savings.
- Operating progress and potential impairment exposure in the Brazil/China start-ups and Dynamic Fuels.
- Developments in the Oklahoma environmental case, EPA/DOJ matter and wage-and-hour litigation, including any changes to recorded contingencies.
- Working-capital needs, capital spending, share repurchases and dividends relative to the company’s liquidity target.