Tyson Foods, Inc. — Q3 2010 Form 10-Q
Reporting period: Third quarter and first nine months of fiscal 2010 ended July 3, 2010; comparisons are with periods ended June 27, 2009. Amounts are in millions except per-share data.
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Sales | $7,438 | $6,662 | $20,989 | $19,490 |
| Gross profit | $752 | $470 | $1,845 | $741 |
| Operating income | $507 | $276 | $1,165 | $107 |
| Net income (loss) attributable to Tyson | $248 | $131 | $567 | $(90) |
| Diluted earnings (loss) per share | $0.65 | $0.35 | $1.49 | $(0.24) |
| Cash provided by operating activities | Not stated for quarter | Not stated for quarter | $1,108 | $684 |
- Sales increased 11.6% in Q3 and 7.7% year to date. The filing attributes growth mainly to higher average selling prices, reflecting increased live-animal and raw-material costs; volumes rose modestly overall.
- Gross margin was approximately 10.1% in Q3 and 8.8% year to date, compared with approximately 7.1% and 3.8%, respectively, in the prior periods. Management cited better operating execution, margin management and improved protein-market conditions.
- Management reported Q3 operating margin of 6.8%, or 6.3% excluding a $38 million insurance recovery. Segment Q3 operating income: Chicken $186 million, Beef $176 million, Pork $125 million, and Prepared Foods $22 million. Chicken’s result included the insurance recovery.
- Q3 interest expense was $102 million, including $34 million of losses on debt repurchases. Nine-month interest expense was $282 million, including $59 million of repurchase losses.
- At July 3, cash and cash equivalents were $834 million; total debt was $2,582 million, including $93 million current debt. Debt was down from $3,477 million at October 3, 2009. Debt-to-capitalization declined to 34.3% from 44.0%.
- Liquidity was approximately $1.66 billion: $834 million of cash plus $828 million available under the $1.0 billion revolving facility after letters of credit. The current ratio was 2.02, versus 2.20 at fiscal year-end 2009.
- Nine-month capital expenditures were $404 million. Operating cash flow exceeded investing outflows of $364 million; financing activities used $915 million, primarily reflecting debt repayments. Cash declined $170 million from the fiscal-year beginning.
Material changes and drivers
- All four core segments reported higher nine-month operating income than in the prior-year period. Total operating income improved by $1,058 million, with Chicken recovering from a $189 million loss to $378 million of income.
- Beef and Pork benefited from improved margins relative to higher cattle and hog prices. Prepared Foods’ Q3 operating income fell to $22 million from $40 million as higher raw-material costs outweighed sales growth; its nine-month result increased to $114 million from $94 million.
- Cash flow from operations rose to $1,108 million from $684 million, while capital spending increased to $404 million from $248 million. Tyson used cash and restricted cash to repay or repurchase debt, including $512 million of 2011 Notes and $218 million of 2016 Notes.
- Other notable items included a $12 million impairment charge on an equity-method investment and a $38 million Hurricane Katrina-related insurance recovery. The nine-month 2009 comparison included a $15 million charge for the Ponca City plant closure and results of the divested Lakeside operation.
Outlook, risks and contingencies
- Management expected fiscal 2010 to finish strongly and anticipated higher overall protein production and improved export markets in fiscal 2011. It forecast fiscal 2010 capital expenditures of approximately $600 million and a preliminary fiscal 2011 plan of approximately $700 million.
- Estimated fiscal 2010 net interest expense was approximately $335 million, including the $59 million of debt-repurchase losses; fiscal 2011 net interest expense was projected at approximately $250 million. Management intended to use available cash and operating cash flow to retire the remaining $327 million of 8.25% Notes due October 2011.
- Management expected higher grain costs could pressure Chicken in fiscal 2011, while cattle supplies were expected to decline 1–2%; hog supplies were expected to be comparable to fiscal 2010, with pork exports remaining strong. Prepared Foods faced likely raw-material cost increases, with a lag before contract price changes take effect.
- Key risks include volatile grain, livestock and energy costs; commodity-derivative earnings volatility; demand, export access and foreign-market conditions; food safety and disease events; labor and grower availability; leverage, credit ratings and refinancing; and litigation and regulation. A 10% change in commodity prices would have affected the fair value of open positions by an estimated $39 million for cattle, $31 million for hogs and $13 million for grain. Variable-rate debt was $228 million.
- Legal matters include wage-and-hour litigation and a consent judgment requiring interim additional pay at certain facilities and timekeeping changes at poultry and certain prepared-foods plants by December 2012. An Oklahoma environmental case was awaiting a court ruling after many damage claims were dismissed; remaining claims included injunctive relief. A separate grower lawsuit produced an $8.7 million judgment that Tyson challenged. A consumer advertising class settlement was approved for up to $5 million in claims and costs, plus $3 million in attorneys’ fees; appeals were pending. Tyson stated it believed reserves were adequate and material loss beyond accrued amounts was remote, while acknowledging uncertainty.
- The $327 million 2011 Notes balance and revolving-credit availability deserve attention: if the notes were not refinanced, purchased or defeased before July 3, 2011, the facility’s maturity and termination could accelerate to that date. The filing also disclosed a potential $225 million maximum obligation under livestock-supplier assistance programs, against $70 million of receivables and a $22 million allowance.
Important facts for investors to verify
- How much of improved earnings and margins was sustainable versus the $38 million insurance recovery, commodity-market conditions and debt-repurchase charges.
- Whether continued raw-material inflation, especially grain and livestock costs, can be passed through to customers without eroding segment margins.
- Progress on retiring the 2011 Notes, compliance with credit-facility covenants, and maintenance of available liquidity.
- Developments and potential financial exposure in wage-and-hour, environmental, grower, water-usage and other legal matters.
- Actual fiscal 2010 and fiscal 2011 capital spending, interest expense, export conditions and segment performance compared with management’s outlook.