Tyson Foods, Inc. — Q1 Fiscal 2020 Form 10-Q
Reporting period: Three months ended December 28, 2019; comparisons are with the three months ended December 29, 2018. Amounts are in U.S. dollars; financial statement figures are in millions unless otherwise noted.
Business context and results
Tyson is a protein and food company operating in Beef, Pork, Chicken and Prepared Foods, with additional international operations. Sales increased 6.1%, reflecting 4.7% higher volume and 1.4% higher average prices. Acquisitions contributed significantly to volume growth, particularly in Chicken and International/Other.
Key financial metrics
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Sales | $10,815 | $10,193 | +6.1% |
| Gross profit | $1,440 | $1,355 | +6.3% |
| Operating income | $826 | $807 | +2.4% |
| Net income attributable to Tyson | $557 | $551 | +1.1% |
| Diluted EPS | $1.52 | $1.50 | +1.3% |
| Cash provided by operations | $894 | $868 | +3.0% |
| Capital expenditures | $312 | $318 | -$6 |
Gross margin was approximately 13.3% in both periods; operating margin was 7.6% versus 7.9%. Operating cash flow less reported capital expenditures was approximately $582 million, a derived measure rather than a company-reported free-cash-flow figure.
At December 28, 2019, cash was $497 million and total debt was $11.719 billion, including $1.947 billion of current debt and $819 million of commercial paper. Net debt was $11.221 billion. Reported liquidity was $1.429 billion, including cash and available revolving-credit capacity net of commercial paper. The current ratio was 1.30. The company reported compliance with debt covenants.
Material changes and segment performance
- Beef: Operating income rose to $410 million from $305 million. Strong demand and improved revenue relative to cattle costs helped, but a fire temporarily closed a facility for most of the quarter, reducing sales volume; net fire-related costs were $16 million.
- Pork: Operating income increased to $191 million from $95 million, supported by stronger export markets and operating performance, partly offset by higher hog costs.
- Chicken: Operating income fell to $57 million from $160 million. Challenging pricing amid increased domestic supply and weak export markets outweighed improved operations; results included $21 million of restructuring costs.
- Prepared Foods: Operating income declined to $158 million from $265 million, reflecting higher raw-material and other costs, including an approximately $80 million increase in raw-material costs, and $22 million of restructuring charges.
- International/Other: Operating income was $10 million versus a loss of $18 million; sales growth primarily reflected the Keystone Foods and Thai and European acquisitions.
Higher interest expense ($120 million versus $99 million) reflected acquisition-related debt and higher rates. Selling, general and administrative expense increased to $614 million from $548 million, including acquisition-related costs and restructuring charges. The effective tax rate was broadly unchanged at 22.7%.
Outlook, risks and unusual items
- Management expected fiscal 2020 capital spending of approximately $1.3 billion and net interest expense of approximately $450 million. It said liquidity and capital resources should be sufficient for operations; no full-year sales or earnings guidance is provided in the supplied filing text.
- A new restructuring program incurred $44 million of severance and employee costs; total restructuring and related charges for the quarter were $52 million. The program targets about 500 position eliminations and estimated savings of $55 million in fiscal 2020 and $65 million in fiscal 2021. The company did not anticipate significant future costs from this program.
- Management cited trade and tariff uncertainty affecting prices and costs, including chicken pricing, and was monitoring the potential effect of the novel coronavirus outbreak; its financial impact was unknown at the filing date. Higher input costs affected all segments, and the company was pursuing recovery through pricing.
- Material legal matters include poultry, pork and cattle/beef antitrust claims, poultry grower and labor-related litigation, and claims concerning a wastewater release at a rendering facility. The company stated it intended to defend the claims; the filing does not provide a clear aggregate estimate of potential losses for these matters.
- In January 2020, after quarter-end, Tyson acquired a 40% interest in a Brazilian poultry producer for $122 million, to be accounted for under the equity method.
Most important facts for investors to verify
- Whether the company can sustain Beef and Pork profitability while Chicken and Prepared Foods face pricing and cost pressure.
- Recovery of production capacity and insurance proceeds following the Beef facility fire, and any resulting volume or cost effects.
- Realization and timing of the restructuring savings, alongside the related charges and planned capital spending.
- Developments in trade policy, export markets, input costs and the coronavirus-related business impact.
- Material developments and potential financial exposure in the antitrust, labor, environmental and other disclosed legal matters.
- The filing gives inconsistent net-debt-to-EBITDA comparisons: MD&A states 2.8x at December 28 and 2.9x at September 28, while the EBITDA reconciliation table appears to show 2.9x and 2.8x, respectively. Verify the intended period mapping.