Tyson Foods, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended September 28, 2019 (52 weeks). Tyson is a diversified protein producer operating Beef, Pork, Chicken and Prepared Foods segments. The filing is an annual report; it also provides fourth-quarter results.
Financial performance
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Sales | $42.405 billion | $40.052 billion | +5.9% |
| Gross profit / margin | $5.022 billion / 11.8% | $5.096 billion / 12.7% | Margin down 0.9 percentage points |
| Operating income / margin | $2.827 billion / 6.7% | $3.032 billion / 7.6% | Income down 6.8% |
| Net income attributable to Tyson | $2.022 billion | $3.024 billion | Down 33.1% |
| Diluted EPS | $5.52 | $8.19 | Down 32.6% |
| Operating cash flow | $2.513 billion | $2.963 billion | Down $450 million |
| Capital expenditures | $1.259 billion | $1.200 billion | Up $59 million |
FY2019 net income included a $105 million after-tax benefit from recognition of previously unrecognized tax benefits. FY2018 included a $1.003 billion after-tax Tax Act benefit, making the year-over-year net income comparison unusually affected by tax items. FY2019 EBITDA was $3.968 billion (non-GAAP), versus $4.021 billion; net debt/EBITDA rose to 2.9x from 2.4x.
Fourth quarter: Sales were $10.884 billion, versus $9.999 billion. Operating income was $604 million, versus $819 million; net income attributable to Tyson was $369 million, versus $537 million; diluted EPS was $1.01, versus $1.47. FY2019 Q4 included $31 million of beef-plant fire costs, a $41 million impairment associated with a planned divestiture, a $15 million pension termination charge and $10 million of restructuring charges.
Liquidity, debt and capital allocation
- At year-end, cash was $484 million, total gross debt $11.932 billion and net debt $11.447 billion. Gross debt rose from $9.873 billion in FY2018; total debt to capitalization increased to 45.6% from 43.5%.
- Reported liquidity was approximately $1.2 billion ($484 million cash plus available revolving credit, net of commercial paper). The company reported a 1.30 current ratio and was in compliance with debt covenants.
- Operating cash flow less capital expenditures was approximately $1.254 billion. Cash used for acquisitions was $2.462 billion; FY2019 acquisitions included Keystone Foods and the Thai and European operations.
- Current debt was $2.102 billion. The $1 billion commercial paper balance had maturities under 25 days; the revolving credit facility had $70 million borrowed and $1.68 billion available before the commercial-paper backstop.
- FY2019 declared dividends were $1.575 per Class A share and $1.418 per Class B share. The company announced a 12% increase in the FY2020 annual dividend rate, subject to Board discretion.
Material changes and segment results
- Sales growth reflected acquisitions and higher average prices in Beef and Prepared Foods; aggregate sales volume rose 8.8%, while average selling prices fell 3.0%. The filing attributes $2.209 billion of net sales change to acquisitions and divestitures.
- Beef operating income increased to $1.107 billion from $1.013 billion, with a 7.0% margin. Results benefited from strong demand and revenue realization relative to cattle costs, partly offset by a plant fire and higher operating costs.
- Pork operating income fell to $263 million from $361 million, with a 5.3% margin. Higher livestock costs, excess domestic pork availability and export constraints compressed margins.
- Chicken operating income fell to $621 million from $866 million, with a 4.7% margin. Acquisitions increased volume, but challenging pricing, operating costs and feed-related costs weighed on results.
- Prepared Foods operating income was nearly flat at $843 million versus $845 million, with a 10.0% margin. Strong demand and mix were offset by higher raw-material and operating costs; divestitures reduced volume.
- Keystone Foods was acquired for approximately $2.3 billion in cash; its post-acquisition sales were $1.970 billion and were not significant to consolidated income. The Thai and European operations were acquired for $326 million, net of cash acquired. Acquisition accounting, integration and synergy realization remain important execution considerations.
Outlook, risks and unusual items
- Management estimated FY2020 capital spending of approximately $1.3 billion and net interest expense of approximately $460 million. It stated that current liquidity and capital resources should be sufficient to operate the business; no clear FY2020 earnings or sales guidance is provided in the supplied filing text.
- Management cited trade-policy uncertainty and tariffs affecting domestic and export prices, increased labor and operating costs, and plans to pursue cost recovery through pricing. Domestic protein production increased approximately 2% in FY2019, according to USDA.
- Key operating risks include volatility in livestock, grain, energy and other input costs; pricing and competitive pressure; animal disease; food safety and recalls; labor availability and disputes; export-market access and foreign exchange; customer concentration; acquisitions and integration; ERP implementation and cybersecurity; and leverage and interest-rate exposure.
- Walmart accounted for 16.9% of FY2019 sales. The Tyson Limited Partnership and Tyson family held approximately 70.97% of voting power, creating concentrated control.
- Material litigation includes poultry and pork antitrust claims and DOJ scrutiny of the chicken industry, as well as cattle and beef antitrust claims. The filing says potential losses for certain matters cannot be reasonably estimated; outcomes could be material. A wastewater release at a recently acquired Alabama rendering facility led to remediation, an anticipated civil penalty and related lawsuits.
- Other notable items: FY2019 included $41 million of restructuring charges and a $55 million pretax gain on sale of an investment. Goodwill and indefinite-lived intangible assets totaled approximately $17.9 billion, about 54% of total assets; management reported no material reporting unit at significant impairment risk. The auditor identified acquisition customer-relationship valuation and indefinite-lived intangible impairment testing as critical audit matters, but gave unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether Chicken and Pork margins recover, and whether elevated labor, feed and livestock costs can be offset by pricing and efficiency gains.
- Post-acquisition performance, integration costs and realized synergies from Keystone Foods and the Thai and European operations; also check final purchase-price allocations.
- Debt reduction, upcoming maturities, refinancing needs and the sustainability of the increased dividend, considering net debt/EBITDA of 2.9x.
- Developments and potential financial exposure in the poultry, pork and cattle antitrust matters, DOJ inquiries, and the Alabama wastewater-related claims.
- Whether the planned divestiture proceeds as expected and whether the $41 million impairment fully reflects the remaining exposure.
- FY2020 execution of the ERP rollout and capital program, as well as any changes in trade access, tariffs, customer concentration or impairment assumptions.