Business context and reporting period
Tyson Foods, Inc. filed this unaudited Form 10-Q for the quarter ended April 2, 2016, and the six months then ended. Tyson operates Chicken, Beef, Pork and Prepared Foods segments; its Other category includes foreign chicken operations in China and India and third-party merger and integration costs. Comparative periods ended March 28, 2015.
Financial performance and position
Amounts are in millions of dollars except per-share data, percentages and ratios.
| Metric | Three months ended Apr. 2, 2016 | Three months ended Mar. 28, 2015 | Six months ended Apr. 2, 2016 | Six months ended Mar. 28, 2015 |
|---|---|---|---|---|
| Sales | $9,170 | $9,979 | $18,322 | $20,796 |
| Gross profit | $1,183 | $989 | $2,384 | $1,945 |
| Operating income | $704 | $547 | $1,480 | $1,056 |
| Net income attributable to Tyson | $432 | $310 | $893 | $619 |
| Diluted EPS | $1.10 | $0.75 | $2.25 | $1.49 |
| Gross margin | 12.9% | 9.9% | 13.0% | 9.4% |
| Operating margin | 7.7% | 5.5% | 8.1% | 5.1% |
For the six months, operating cash flow was $1,105, compared with $808 a year earlier. Capital spending was $355; investing cash outflow was $352 and financing cash outflow was $1,189. Cash declined by $434 to $254. Cash and short-term investments were $257 at period-end. Total debt was $6,349, down from $6,725 at October 3, 2015; net debt was $6,092 versus $6,035. Current assets were $4,927 and current liabilities $2,610; the current ratio was 1.89. The company reported approximately $1.2 billion of total liquidity, including $943 million available under its $1.25 billion revolving facility. Net debt/EBITDA was 1.8x, versus 2.1x at fiscal year-end.
Material changes versus prior period
- Second-quarter sales fell 8.1%; average selling prices declined 7.3%, while volume fell 0.9%. Excluding the Mexico chicken operation sold in fiscal 2015, volume increased 2.1%. For the first half, sales fell 11.9%, with volume down 4.0% and price down 8.2%; excluding divestitures, volume grew 0.4%.
- Lower input costs—especially cattle, hogs and feed—supported higher gross profit and operating income. Second-quarter operating income rose 29%. Beef returned to operating profit; Chicken and Pork reported record second-quarter earnings, according to management.
- Segment second-quarter operating income: Chicken $347 (up from $332); Beef $46 (versus a $20 loss); Pork $140 (up from $99); Prepared Foods $197 (up from $160); Other loss $26 (versus $24). Prepared Foods benefited from lower input costs and synergies.
- SG&A rose to $479 from $442 in the quarter, including higher employee costs and planned advertising and promotions. Six-month SG&A was $904 versus $889.
- Tyson repurchased $826 of Class A shares in the first half, versus $150 a year earlier, and paid $108 in dividends versus $75. Period-end cash was lower despite stronger operating cash flow, largely amid buybacks, debt repayment and working-capital movements.
Outlook, management commentary and risks
- Management expected domestic protein production to rise 2%–3% for fiscal 2016 and moderate export-market growth, while warning that increased domestic supply could pressure prices. Export markets remained challenging.
- Management expected fiscal 2016 capital spending of approximately $850 and net interest expense of approximately $245. It said liquidity and capital resources should be sufficient for operations.
- Tyson estimated Hillshire synergies and its legacy Prepared Foods profit-improvement plan would contribute more than $500 in fiscal 2016 and more than $700 in fiscal 2017. It reported $144 of synergies and profit-improvement benefits in the second quarter and $265 for the first half; some benefits were offset by investment in innovation, launches and brands.
- Fiscal 2016 earnings included a $12 tax benefit, or $0.03 per diluted share, from recognition of previously unrecognized tax benefits. The second-quarter effective tax rate was 32.7%; the first-half rate was 34.0%.
- Risks cited include commodity-cost and finished-product price volatility, livestock supply and disease, export access, food safety, labor and grower availability, customer concentration, litigation, regulation, leverage and integration execution. The company reported compliance with debt covenants.
- Contingencies include employment litigation over pre- and post-shift work; the U.S. Supreme Court affirmed a verdict in the Bouaphakeo matter and remanded it for allocation of the award. A Philippines labor matter remained pending for non-settling complainants. Tyson also disclosed an EPA investigation related to a Missouri discharge incident; the outcome was uncertain. Management stated it believed appropriate accruals had been made, but adverse outcomes could be material.
Important facts for investors to verify
- Whether lower commodity costs and favorable segment conditions persist, particularly as supply growth may pressure protein prices and margins.
- Progress toward the stated fiscal 2016 and fiscal 2017 synergy targets, and the extent of related reinvestment and integration costs.
- Cash conversion and working-capital trends, given the decline in cash and rise in net debt despite stronger operating cash flow.
- Capital allocation and funding needs, including continued buybacks, expected capital spending, debt maturities and remaining TEU share settlement obligations.
- Developments, accruals and potential exposure in the disclosed employment, Philippines labor, environmental and other legal matters.