Tyson Foods, Inc. — Q2 FY2019 Form 10-Q
Reporting period: Quarter and six months ended March 30, 2019. Financial statements are unaudited; amounts are in millions except per-share data.
Business context and results
Tyson operates Beef, Pork, Chicken and Prepared Foods segments. Second-quarter growth included acquired Keystone Foods operations; comparisons also reflect the prior-year divestitures of non-protein businesses.
| Metric | Q2 FY2019 | Q2 FY2018 | Six months FY2019 | Six months FY2018 |
|---|---|---|---|---|
| Sales | $10,443 | $9,773 | $20,636 | $20,002 |
| Gross profit | $1,192 | $1,015 | $2,547 | $2,458 |
| Operating income | $635 | $494 | $1,442 | $1,416 |
| Net income attributable to Tyson | $426 | $315 | $977 | $1,946 |
| Diluted EPS | $1.17 | $0.85 | $2.67 | $5.25 |
Q2 sales grew 6.9%, as volume rose 11.6% and average selling price declined 4.8%; acquisitions, particularly Keystone, contributed substantially to volume. Q2 operating margin was 6.1% versus 5.1%. For the first half, sales increased 3.2%, operating income rose 2%, and operating margin was approximately 7.0% versus 7.1%.
- Q2 segment operating income: Beef $156 (up from $92); Pork $100 (up from $67); Chicken $141 (down from $231); Prepared Foods $245 (up from $119); Other loss $7 (versus loss of $15).
- First-half segment operating income: Beef $461 (up from $348); Pork $195 (down from $218); Chicken $301 (down from $503); Prepared Foods $510 (up from $375).
Q2 performance benefited from Beef strength, improved Pork results, and Prepared Foods demand and mix. Chicken earnings were pressured by higher feed and operating costs and market conditions. First-half net income fell sharply because the prior-year period included a $1,003 tax benefit from deferred-tax remeasurement; the periods are not directly comparable on reported net income.
Cash flow, debt and liquidity
- First-half cash from operations was $939, down from $1,139. Capital expenditures were $656, compared with $559; cash used in investing was $2,766, including $2,141 of acquisitions, principally Keystone.
- Cash and equivalents were $360 at March 30, 2019, versus $270 at September 29, 2018. Total debt was $12,374, up from $9,873; net debt was $12,012 versus $9,602.
- Net debt/EBITDA was 2.9x, compared with 2.4x at fiscal 2018 year-end. The company reported $1,930 of liquidity, a 1.38 current ratio, and no borrowings under its $1.75 billion revolving facility. It was in compliance with debt covenants.
- Tyson issued $2.8 billion of senior notes during the half, including notes due 2026 and 2029 and additional 2048 notes. Proceeds refinanced acquisition-related borrowing and supported the pending BRF transaction. Q2 interest expense rose to $119 from $86.
Outlook, commentary and risks
Management expected fiscal 2019 capital spending of approximately $1.3–$1.4 billion and net interest expense of approximately $450 million. It said existing liquidity and expected operating cash flow should be sufficient for anticipated needs. No specific full-year sales or earnings guidance is stated in the supplied filing text.
Tyson expected the $340 million cash acquisition of BRF’s Thai and European operations to close in fiscal Q3 2019, subject to customary conditions and regulatory approvals. Keystone integration and realizing its expected benefits remain execution risks. Management cited trade and tariff uncertainty, export and pricing impacts, labor and operating cost increases, commodity and feed-price volatility, supply conditions, and the need to recover costs through pricing.
Notable items include $37 million of first-half Keystone purchase-accounting and acquisition costs and $16 million of restructuring charges. The multi-year Financial Fitness Program had incurred $225 million of an estimated $253 million in pretax charges by March 30. Material legal matters include poultry, pork and cattle antitrust litigation, an acquired Korean subsidiary’s criminal proceedings, and a Philippine labor case for which Tyson maintains an accrual. The filing describes ultimate outcomes as uncertain; additional material losses cannot be ruled out. Management reported effective disclosure controls and no material change in risk factors from its prior annual report.
Investor verification priorities
- Assess how much reported sales and volume growth reflects acquisitions versus underlying performance, and review Keystone integration progress and final purchase-price accounting.
- Monitor Chicken segment recovery, feed and labor costs, and the sustainability of Beef, Pork and Prepared Foods margins.
- Reconcile first-half earnings and cash generation with working-capital movements, capital spending, acquisition outlays and increased debt; track leverage and interest costs.
- Check the BRF acquisition’s closing, financing and integration status, and whether management’s capital-spending and interest-expense expectations remain current.
- Follow developments, potential exposure and accrual adequacy for antitrust and other disclosed litigation and contingencies.