Tyson Foods, Inc. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2011, ended July 2, 2011; comparative periods ended July 3, 2010. Amounts are in millions of dollars except per-share data.
Business context and financial performance
Tyson operates Chicken, Beef, Pork and Prepared Foods businesses. Management cited strong Beef and Pork demand and exports, while Chicken faced high feed costs and excess supply. Higher selling prices across all segments drove sales growth, largely reflecting higher input costs.
| Metric | Three months 2011 | Three months 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Sales | $8,247 | $7,438 | $23,862 | $20,989 |
| Gross profit | $531 | $752 | $1,808 | $1,845 |
| Operating income | $312 | $507 | $1,113 | $1,165 |
| Net income attributable to Tyson | $196 | $248 | $653 | $567 |
| Diluted earnings per share | $0.51 | $0.65 | $1.71 | $1.49 |
Quarterly sales rose 10.9%, as average selling prices increased 12.3% and volume declined 1.3%. Nine-month sales rose 13.7%, with prices up 11.4% and volume up 2.1%. Gross margin fell to 6.4% from 10.1% in the quarter and was 7.6% versus 8.8% year to date. Operating margin was 3.8% in the quarter and 4.7% year to date.
Quarterly results reflected sharply lower Chicken earnings: segment operating income was $28 versus $186 a year earlier. Beef operating income was $140 versus $176; Pork was $124 versus $125; Prepared Foods was $30 versus $22. For nine months, Chicken earned $246 versus $378, Beef $350 versus $421, Pork $447 versus $256, and Prepared Foods $89 versus $114.
Cash flow, balance sheet and liquidity
- Operating cash flow for the first nine months was $686, down from $1,083. The $421 working-capital use primarily reflected higher inventory and receivables, in part due to higher input costs and selling prices.
- Capital expenditures were $469; operating cash flow less capital expenditures was $217. Investing activities used $471 and financing activities used $217. Cash ended at $981, versus $978 at fiscal year-end.
- Total debt was $2,456, including $362 current debt, compared with $2,536 at October 2, 2010. Debt-to-total capitalization declined to 29.8% from 32.8%. The company reported compliance with debt covenants.
- Liquidity was $1,821: $981 cash and $840 available under the $1.0 billion revolving facility after $160 of letters of credit. The reported current ratio was 1.87.
- Inventory increased to $2,711 from $2,274. The company repurchased 4.4 million shares for approximately $80 under its reactivated buyback plan; total Class A share purchases were $110 including equity-plan purchases. Quarterly dividends were $0.040 per Class A share and $0.036 per Class B share.
Changes, outlook and notable items
- Quarterly net income attributable to Tyson declined 21%, while nine-month net income increased 15%. The quarter’s $21 tax-expense reduction from reversing foreign uncertain-tax-position reserves benefited results. Prior-year comparisons included $38 of Chicken insurance proceeds; fiscal 2010 also included note-repurchase losses and a $12 investment impairment. Fiscal 2011 year-to-date included an $11 investment-sale gain.
- Input costs rose substantially: quarterly live cattle and hog costs increased about $535, and Chicken grain and feed costs about $250. Management said production cuts in Chicken would affect sales volumes later in the fourth quarter.
- Fiscal 2011 outlook: Sales expected to exceed $32 billion; capital expenditures about $650; net interest expense about $235. Management expected a Chicken segment loss in the fourth quarter as weak pricing and excess supply persisted. Beef, Pork and Prepared Foods fundamentals were expected to remain broadly stable.
- Fiscal 2012 outlook: Management expected slightly lower overall domestic protein production and continued strong exports to support pricing. Chicken was expected to improve gradually, but grain costs were forecast higher. Pork’s normalized operating-margin range was raised to 6–8%. Expected net interest expense was about $200. Preliminary capital spending was similar to fiscal 2011.
- The $295 balance of 8.25% notes was due October 1, 2011; management planned to repay it with cash and operating cash flow. The revolving facility’s February 2016 maturity depended on specified ratings or refinancing/defeasance conditions for the 2014 notes; otherwise, it could mature in November 2013.
- The minority partner in the China joint ventures exercised put options requiring a $65 cash purchase of its interest, pending Chinese government approval. Management identified commodity costs, market supply and pricing, exports, disease, labor, food safety, regulation, litigation and leverage as risks; it cautioned that actual results may differ from forecasts.
Contingencies and other risks
The filing describes multiple wage-and-hour suits alleging unpaid time for changing and related activities. In one Kansas case, a jury awarded $503,011, with plaintiffs seeking approximately $3.5 million in attorneys’ fees; Tyson was evaluating appeal options. Other cases remained pending. Oklahoma’s environmental case sought more than $800 million in damages, but earlier rulings dismissed several damages claims and narrowed remaining claims principally to injunctive relief; the filing does not state a final outcome. In a separate Oklahoma growers’ case, a judgment of approximately $8.7 million was appealed. The company also disclosed a potential water-use assessment of approximately $560,000 against its Mexican subsidiary, awaiting a final determination.
Important facts for investors to verify
- Whether Chicken pricing, supply reductions and feed costs developed as management forecast, including the anticipated fourth-quarter segment loss.
- Whether working-capital investment and capital spending affected subsequent operating cash flow and liquidity.
- Repayment of the $295 million notes due October 2011 and satisfaction of the revolving facility’s maturity conditions.
- Developments and potential financial exposure in wage-and-hour, environmental and grower litigation, and the China joint-venture put-option purchase.
- The sustainability of Pork’s improved year-to-date performance and management’s revised 6–8% normalized margin range.
- The extent to which the $21 million tax benefit and other unusual items affected reported earnings and comparisons.