Tyson Foods, Inc. — Q2 FY2012 Form 10-Q
Reporting period: Three and six months ended March 31, 2012; comparable periods ended April 2, 2011. Amounts are in millions except per-share data.
Business context and results
Tyson produces and markets chicken, beef, pork, prepared foods and related products through four operating segments. Management said results benefited from improved domestic chicken conditions and strong Pork and Prepared Foods performance, while Beef faced volatile markets and difficulty passing higher input costs through to customers.
| Metric | Q2 FY2012 | Q2 FY2011 | Six months FY2012 | Six months FY2011 |
|---|---|---|---|---|
| Sales | $8,268 | $8,000 | $16,597 | $15,615 |
| Gross profit | $535 | $533 | $1,028 | $1,277 |
| Operating income | $302 | $303 | $580 | $801 |
| Net income attributable to Tyson | $166 | $159 | $322 | $457 |
| Diluted EPS | $0.44 | $0.42 | $0.86 | $1.20 |
Q2 sales rose 3.4%, as a 7.7% increase in average selling prices more than offset a 4.3% decline in volume. Gross margin was approximately 6.5% and operating margin approximately 3.7% in Q2. For the six-month period, sales increased 6.3%, but gross profit fell 19.5% and operating income fell 27.6%; higher input costs outpaced price gains. Cost of sales rose to 93.8% of sales from 91.8% for the six months.
Segments and material changes
| Segment | Q2 FY2012 operating income (prior year) | Six-month FY2012 operating income (prior year) | Management’s explanation |
|---|---|---|---|
| Chicken | $145 ($37) | $177 ($218) | Q2 improved on pricing, mix and efficiencies; higher feed and growout costs weighed on results. |
| Beef | $(1) ($94) | $30 ($210) | Lower cattle availability, soft demand, volatility and higher operating costs pressured margins. |
| Pork | $115 ($146) | $280 ($323) | Strong exports, favorable market conditions, mix and operations supported results, though income remained below prior year. |
| Prepared Foods | $44 ($31) | $95 ($59) | Pricing, mix and lower input-cost volatility supported improvement despite lower volumes and higher raw material costs. |
Across the business, Q2 higher input costs added $638 to cost of sales, including $500 from live cattle and hog costs; lower volume reduced costs by $372. For the six months, higher input costs added $1.9 billion, including $1.3 billion from live cattle and hogs and $285 from chicken feed ingredients. Six-month results also included an $11 gain on the sale of an equity-method investment in the prior-year period; FY2012 other income included $8 of joint-venture equity earnings and $6 of foreign-exchange gains.
Cash flow, debt and liquidity
- Six-month operating cash flow was $454, versus $203 a year earlier; working-capital changes used $207, compared with $603 used in the prior period. Q2 operating cash flow was $116.
- Six-month capital expenditures were $344, versus $319. Cash used for investing was $339; cash used for financing was $113. Cash and equivalents ended at $723, up $7 from the fiscal-year start.
- Total debt was $2,220 at March 31, 2012, versus $2,182 at October 1, 2011. The debt-to-total-capitalization ratio was 27.2%, compared with 27.7%. Tyson reported compliance with debt covenants.
- Liquidity was approximately $1.678 billion: $723 cash plus $955 available under the $1.0 billion revolving facility after $45 of outstanding letters of credit. The current ratio was 2.19.
- The $458 of 3.25% convertible notes is due October 2013. The $810 of 10.5% notes is due March 2014. The revolving facility’s stated maturity is February 2016, but it may mature November 29, 2013 if specified conditions tied to ratings or the 2014 notes are not met. As of quarter-end, none of those conditions had occurred.
- Six-month share repurchases totaled $128, including $105 under the announced program; dividends were $29. On May 3, after quarter-end, the board added 35 million shares to the repurchase authorization. As of May 7, 42.4 million shares remained available.
Outlook, risks and contingencies
Management forecast FY2012 sales of approximately $34 billion, capital expenditures of $800–$850, and net interest expense of approximately $190. It expected domestic protein availability to decline 2–3% year over year, with exports remaining strong. Chicken results were expected to remain strong, with $125 of additional FY2012 operational savings targeted; Beef was expected to return to its normalized range in Q4 and be profitable for the year; Pork was expected to exceed its normalized range for the year but not repeat first-half results; Prepared Foods was expected to remain within its normalized range. Management said liquidity exceeded its $1.2 billion goal and expected continued share repurchases, subject to market conditions, liquidity needs, debt obligations and regulatory requirements.
Key operating risks include volatility and availability of livestock, grain, energy and other inputs; pricing and demand for finished products; export-market access and currency movements; disease outbreaks; labor and contract-grower relationships; food safety and recalls; customer concentration; regulation; and litigation. The filing reports material employment wage-and-hour cases, including jury awards in the Garcia and Bouaphakeo matters, and other pending actions. Oklahoma’s Illinois River Watershed case seeks more than $800 in compensatory damages plus unspecified punitive damages, although several claims were dismissed and the court had not issued its post-trial decision. EPA/DOJ discussions concern alleged Clean Air Act Risk Management Plan issues at 15 facilities and may involve penalties and injunctive relief. Tyson said it believed appropriate accruals were recorded and that material losses beyond accruals were remote, while acknowledging outcomes remain uncertain.
Commodity, interest-rate and foreign-exchange exposures are managed partly through derivatives; mark-to-market changes can create earnings volatility. Management stated disclosure controls were effective as of March 31, 2012, and reported no material change in internal control over financial reporting during the quarter. The filing provides no specific numerical full-year earnings or EPS guidance.
Important facts for investors to verify
- Whether improved Chicken and Prepared Foods performance can offset continuing Beef pressure and first-half year-over-year profit declines.
- Actual livestock, feed and other input-cost trends versus the company’s pricing, mix and efficiency assumptions.
- Progress toward the $34 billion sales, $800–$850 capital-spending and $190 net-interest outlooks, and whether the targeted $125 Chicken savings are achieved.
- Liquidity and refinancing plans for the 2013 convertible notes and 2014 notes, including the revolving facility’s conditional earlier maturity provisions.
- Developments, accrual adequacy and potential financial exposure in the wage-and-hour, Oklahoma environmental and EPA/DOJ matters.
- Share repurchase pace and its effect on liquidity, debt capacity and per-share results.