Tyson Foods, Inc. — FY2011 Form 10-K Summary
Reporting period: Fiscal year ended October 1, 2011 (52 weeks). This is an annual filing, not a standalone fourth-quarter filing; quarterly figures are included below. Unless noted otherwise, financial amounts are in millions of dollars.
Business context and reporting period
Tyson produces and markets chicken, beef, pork, prepared foods and related products through four operating segments: Chicken, Beef, Pork and Prepared Foods. It sells in the U.S. and internationally; fiscal 2011 exports from the U.S. were $4.1 billion. Wal-Mart accounted for 13.3% of consolidated sales. Management cited customer demand, access to export markets, protein prices, livestock and feed costs, and facility efficiency as key business drivers.
Financial performance and liquidity
| Metric | FY2011 | FY2010 |
|---|---|---|
| Sales | $32,266 | $28,430 |
| Gross profit / margin | $2,199 / 6.8% | $2,514 / 8.8% |
| Operating income / margin | $1,285 / 4.0% | $1,556 / 5.5% |
| Net income attributable to Tyson | $750 | $780 |
| Diluted earnings per share attributable to Tyson | $1.97 | $2.06 |
| Operating cash flow | $1,046 | $1,432 |
| Capital expenditures | $643 | $550 |
| Cash and cash equivalents at year-end | $716 | $978 |
| Total debt at year-end | $2,182 | $2,536 |
| Current ratio | 2.01 | 1.81 |
| Debt to capitalization | 27.7% | 32.8% |
FY2011 sales rose 13.5%, reflecting a 11.8% increase in average selling prices and 1.7% higher volume. Cost of sales increased $4.2 billion, including approximately $3.7 billion from higher input costs: notably $2.4 billion for cattle and hogs and $675 million for chicken feed ingredients. Chicken operational improvements offset about $200 million of costs.
Segment operating income and margins were: Chicken $164 (1.5%), Beef $468 (3.5%), Pork $560 (10.3%) and Prepared Foods $117 (3.6%). Pork income increased; Chicken income fell sharply amid high feed costs and excess industry supply; Beef income declined from FY2010; Prepared Foods income was slightly lower.
For the fourth quarter of FY2011, sales were $8,404, operating income $172, net income attributable to Tyson $97 and diluted EPS $0.26. In fourth-quarter FY2010, those figures were $7,441, $391, $213 and $0.57, respectively.
Operating cash flow decreased from $1,432 to $1,046, primarily as working capital consumed $346 million, driven by higher inventory and receivables associated with input-cost and selling-price increases. Investing cash outflow was $644; financing cash outflow was $658. Year-end liquidity was approximately $1,558, including $716 cash and $842 available under a $1 billion revolver after letters of credit. The company repurchased 9.7 million shares for approximately $170 million under its program and paid $59 million in dividends.
Material changes versus the prior comparable period
- Sales increased $3.8 billion, but gross profit fell $315 million and operating income declined $271 million as elevated commodity and livestock costs outpaced pricing recovery.
- Net income attributable to Tyson decreased $30 million; diluted EPS declined from $2.06 to $1.97.
- Debt fell $354 million and debt-to-capitalization improved, while cash declined $262 million. Operating cash flow decreased $386 million.
- Segment performance diverged: Pork operating income rose $179 million, while Chicken fell $355 million and Beef fell $74 million; Prepared Foods declined $7 million.
Outlook, risks, contingencies and unusual items
- FY2012 outlook: Management expected sales above $34 billion, domestic protein availability down 2–3%, and strong exports. It forecast capital expenditures of approximately $800–$850 million and net interest expense of approximately $185 million. It expected Chicken profitability to strengthen, Pork fundamentals to remain strong, Beef to return to its normalized range during the year, and Prepared Foods profitability to improve. These are forecasts, not guarantees.
- Debt and liquidity: Management planned to maintain liquidity above $1.2 billion and continue share repurchases when appropriate. The $458 million 3.25% convertible notes due 2013 could become eligible for early conversion if specified stock-price conditions are met. The $810 million 10.50% notes mature in March 2014; the revolving facility’s 2016 maturity is subject to conditions tied to refinancing or addressing those notes by November 2013. The company reported covenant compliance at year-end.
- Key operating risks: Commodity-price and supply volatility—especially feed grains, cattle and hogs—may pressure margins; the company has limited ability to pass cost increases through immediately. Other risks include disease outbreaks, food safety and recalls, labor availability and disputes, customer concentration and consolidation, foreign-market access and currency, regulation, leverage, and weather or transportation disruptions.
- Goodwill sensitivity: Goodwill was $1.9 billion, about 17.1% of assets. The Domestic Chicken reporting unit carried $900 million of goodwill and passed the annual impairment test using forecast margins expected to normalize at 5–7%. Management disclosed that a 15% decline in its fair value, projected margins averaging below 4%, or a 0.9 percentage-point increase in the discount rate could have triggered the second impairment-test step and potentially a material impairment.
- Legal and other contingencies: An EPA/DOJ investigation concerned alleged Clean Air Act Risk Management Plan noncompliance at 15 facilities; monetary penalties and injunctive relief were anticipated, but no amount was specified. Oklahoma’s Illinois River Watershed case sought injunctive relief and damages in excess of $800 million; several damages claims were dismissed, while injunctive claims remained. A poultry employee wage settlement required $12.25–$17.5 million in employee payments, with attorneys’ fees and costs capped at $14.5 million; other wage-and-hour cases remained pending. The filing also described a Mexican water-permit assessment estimated at about $560,000, subject to final determination. Management said other outstanding matters were not expected to materially adversely affect consolidated results or financial position, while acknowledging uncertainty.
- Unusual FY2011 items: Net income included an $11 million gain on sale of an equity-method investment and a $21 million tax-expense reduction from reversal of foreign uncertain-tax-position reserves. FY2010 included $61 million of note-repurchase losses, a $29 million goodwill impairment, a $12 million equity-method investment impairment and $38 million of insurance proceeds.
Important facts for investors to verify
- Whether FY2012 price increases and lower industry protein supply offset the expected higher feed and raw-material costs, particularly in Chicken.
- Whether operating cash flow recovers as inventory and receivables normalize, and whether planned capital spending and buybacks remain consistent with liquidity targets.
- Debt refinancing or other arrangements addressing the $810 million 2014 notes and the related revolver maturity conditions.
- Progress and outcomes in the EPA/DOJ inquiry, Oklahoma environmental litigation, and remaining wage-and-hour cases, including any effects beyond recorded accruals.
- Domestic Chicken results and forecast assumptions supporting the $900 million goodwill balance and impairment-test headroom.
- Customer concentration: Wal-Mart represented 13.3% of sales and 16.5% of net receivables.