Tyson Foods, Inc. — Q3 FY2017 Form 10-Q
Reporting period: Three and nine months ended July 1, 2017, compared with periods ended July 2, 2016. Amounts are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Business context
Tyson operates Beef, Pork, Chicken and Prepared Foods segments. On June 7, 2017, it acquired AdvancePierre Foods for approximately $3.2 billion, adding ready-to-eat sandwiches, entrées and snacks. The filing includes AdvancePierre’s results only from the acquisition date; those results were described as insignificant to reported income for the period.
Key financial results
| Metric | Q3 FY2017 | Q3 FY2016 | Nine months FY2017 | Nine months FY2016 |
|---|---|---|---|---|
| Sales | $9,850 | $9,403 | $28,115 | $27,725 |
| Gross profit | $1,202 | $1,224 | $3,732 | $3,608 |
| Operating income | $697 | $767 | $2,250 | $2,247 |
| Net income attributable to Tyson | $447 | $484 | $1,380 | $1,377 |
| Diluted EPS | $1.21 | $1.25 | $3.72 | $3.50 |
| Operating margin | 7.1% | 8.2% | 8.0% | 8.1% |
- Q3 sales rose 4.8%, driven by higher average prices and volume, including $118 million of net sales from AdvancePierre after acquisition. Operating income fell 9% year over year; higher sales did not offset costs and weaker Chicken and Prepared Foods performance.
- For the nine months, sales increased 1.4% and operating income was nearly flat. Net income attributable to Tyson rose slightly, while diluted EPS increased from $3.50 to $3.72.
- Q3 cost of sales rose $469 million year over year, including higher input costs and $71 million of net realized derivative losses, versus $46 million of net realized gains a year earlier. SG&A increased $48 million, primarily from the acquisition and related expenses.
- Cash provided by operating activities was $1,449 million for nine months, down from $1,873 million. Working-capital changes used $558 million, principally reflecting higher receivables and inventory and lower payables. Capital expenditures were $782 million.
- Cash was $231 million at July 1. Total debt was $10,824 million, up from $6,279 million at October 1, 2016; net debt was $10,589 million. Net debt/EBITDA rose to 3.0x from 1.7x. The company reported $1,037 million of liquidity, a 1.63 current ratio, and compliance with debt covenants.
Segment performance and material changes
| Segment | Q3 operating income | Q3 year-over-year change | Nine-month operating income | Nine-month year-over-year change |
|---|---|---|---|---|
| Beef | $147 | +$56 | $572 | +$364 |
| Pork | $136 | +$14 | $524 | +$104 |
| Chicken | $294 | −$86 | $790 | −$295 |
| Prepared Foods | $174 | −$23 | $451 | −$150 |
Beef and Pork improved on favorable market conditions, demand and exports. Chicken earnings declined from prior-year record levels amid higher operating costs; two plant fires added $24 million of net costs during the nine months. Prepared Foods was affected by higher facility and input costs, acquisition-related costs and a $52 million San Diego operation impairment recorded in the second quarter. Segment results also include purchase-accounting and integration effects.
Outlook, management commentary and notable items
- Management expected fiscal 2017 capital spending of approximately $1 billion and net interest expense of approximately $270 million.
- Management estimated fiscal 2017 Hillshire Brands synergies and legacy Prepared Foods profit improvements would contribute approximately $675 million. It reported $501 million realized in the first nine months. For AdvancePierre, management estimated net synergies exceeding $200 million by fiscal 2020, with no significant synergies expected in fiscal 2017.
- Management expected domestic protein production to increase approximately 3% for fiscal 2017. Pork margins were above their normalized range; it described Beef conditions as improved and Chicken earnings as strong despite being below the prior-year record.
- Tyson planned to sell Sara Lee Frozen Bakery, Kettle and Van’s non-protein businesses, with closing anticipated by the end of calendar 2017 and a net pretax gain expected. The businesses were classified as held for sale, not discontinued operations.
- Q3 included $77 million of AdvancePierre purchase-accounting and acquisition-related costs, including a $24 million inventory step-up charge, $35 million of acquisition costs and $18 million of bridge financing fees. A $26 million tax benefit related to the planned business sale partly offset period taxes. The nine-month period also included the $52 million impairment.
- Important risks include commodity and livestock prices, operating disruptions, leverage and interest rates, acquisition integration and achieving estimated synergies, food safety, market access, and litigation or regulatory outcomes. The company disclosed poultry price-fixing and grower-compensation antitrust claims, an early-stage SEC investigation related to poultry allegations, and a pending Philippines labor matter with an uncertain ultimate enforceable loss; the recorded accrual was significantly below the NLRC’s approximately $294 million award. A Tyson shareholder class action was dismissed on July 26, 2017, after quarter-end.
- Management said disclosure controls were effective as of July 1, 2017; integration of AdvancePierre’s internal controls was ongoing.
Investor verification priorities
- Track post-acquisition operating contribution, final purchase-price allocation, goodwill and intangible-asset valuations, and the costs and timing of integration and synergies.
- Monitor debt, refinancing needs, interest expense, leverage and liquidity after the acquisition; assess cash conversion and working-capital requirements.
- Evaluate whether Chicken and Prepared Foods margins recover, and distinguish recurring performance from plant-fire effects, impairments, derivative volatility and acquisition-related charges.
- Follow the planned divestitures, expected gain and use of proceeds, and verify management’s capital-spending and interest-expense outlook against subsequent results.
- Review developments in poultry antitrust and regulatory matters and the Philippines labor case, including whether recorded legal accruals remain adequate.