Tyson Foods, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended September 30, 2017 (52 weeks). The filing also reports fourth-quarter results. Tyson is a protein and prepared-foods producer operating Beef, Pork, Chicken and Prepared Foods segments. Figures below are in U.S. dollars; financial amounts are in millions unless stated otherwise.
Financial performance and position
| Metric | FY2017 | FY2016 | Change / context |
|---|---|---|---|
| Sales | $38,260 | $36,881 | Up 3.7%; volume up 1.0% and average selling prices up 2.7%. Includes $508 of post-acquisition AdvancePierre sales. |
| Gross profit / gross margin | $5,083 / 13.3% | $4,697 / 12.7% | Margin improved despite higher input costs. |
| Operating income / margin | $2,931 / 7.7% | $2,833 / 7.7% | Operating income up 3%, a company record. |
| Net income attributable to Tyson | $1,774 | $1,768 | Nearly flat; diluted EPS rose to $4.79 from $4.53. |
| Cash from operations | $2,599 | $2,716 | Down $117. |
| Capital expenditures | $1,069 | $695 | Up $374; operating cash flow less capex was approximately $1,530. |
| Total debt / cash | $10,203 / $318 | $6,279 / $349 | Net debt was $9,882; net debt/EBITDA rose to 2.7x from 1.7x. |
| Liquidity / current ratio | $1,035 / 1.55x | — / 1.77x | Liquidity includes cash, short-term investments and available revolver capacity, net of commercial paper. |
FY2017’s effective tax rate was 32.3% versus 31.8%. Return on invested capital declined to 16.3% from 18.1%. The company paid $319 in dividends and spent $797 on share repurchases under its repurchase program.
Fourth quarter
FY2017 Q4 sales were $10,145, operating income $681, net income attributable to Tyson $394 and diluted EPS $1.07. In FY2016 Q4, those figures were $9,156, $586, $391 and $1.03, respectively. FY2017 Q4 included $150 of restructuring charges, a $45 impairment related to a planned non-protein business sale and $26 of AdvancePierre purchase-accounting and acquisition costs.
Material changes and segment results
- Beef: Sales of $14,823; operating income rose to $877 from $347, with margin up to 5.9% from 2.4%. Favorable cattle-market conditions, exports and execution drove the improvement.
- Pork: Sales of $5,238; operating income increased to $645 from $528, and margin rose to 12.3% from 10.8%, supported by demand, exports and operating performance.
- Chicken: Sales of $11,409; operating income fell to $1,053 from $1,305, and margin declined to 9.2% from 11.9%. Higher operating costs, fires, integration and restructuring costs outweighed approximately $80 of lower feed costs.
- Prepared Foods: Sales of $7,853; operating income fell to $462 from $734, and margin declined to 5.9% from 10.0%. Results included impairments, restructuring, acquisition costs and higher operating costs, partly offset by synergies and AdvancePierre sales.
Tyson acquired AdvancePierre on June 7, 2017, for approximately $3.2 billion. The acquisition expanded convenience and ready-to-eat foods but contributed to higher debt and one-time costs. Tyson also announced the planned sale of Sara Lee Frozen Bakery, Kettle and Van’s businesses; $807 of related assets were classified as held for sale at year-end, and a $45 impairment was recorded.
Outlook, risks and unusual items
- Outlook and capital allocation: FY2018 capital spending was expected to approximate $1.4 billion and net interest expense approximately $325. Management anticipated reaching its approximately 2x net-debt/EBITDA target by Q3 FY2018 and did not plan further share repurchases, other than for equity-plan obligations, until reaching that target.
- Financial Fitness Program: Management estimated cumulative net savings of $200 by FY2018, $400 by FY2019 and $600 by FY2020, with approximately 50–60% expected in Prepared Foods. The plan anticipates eliminating about 500 positions and approximately $215 of cumulative pretax charges; $150 was recorded in FY2017. Savings and implementation costs are estimates, not guaranteed results.
- Dividends: The board raised the quarterly Class A dividend to $0.30 per share and Class B to $0.27. Tyson anticipated FY2018 annual rates of $1.20 and $1.08, respectively, subject to board action.
- Key business risks: Volatility in livestock, grain, feed, energy and other input costs; ability to pass costs through without losing volume; disease outbreaks and food-safety events; international trade access and currency movements; labor and grower availability; cyber and ERP implementation risks; and successful integration of AdvancePierre. Walmart accounted for 17.3% of FY2017 sales, creating customer concentration exposure.
- Legal and regulatory matters: Broiler-chicken antitrust and grower-compensation class actions remained pending; the SEC advised it did not intend to recommend enforcement action based on its investigation, while a Florida Attorney General inquiry continued. A proposed $12.6 settlement of several wage cases awaited court approval. A Hillshire-related asbestos verdict of approximately $13 was being appealed. A subsidiary’s Clean Water Act plea included a $2 fine, a $0.5 community payment and environmental audits, subject to final court approval. The filing describes other material claims, including Philippine labor litigation with uncertain ultimate exposure.
- Asset and pension exposures: Goodwill and indefinite-lived intangibles totaled approximately $13.4 billion, about 48% of assets. Prepared Foods goodwill testing depended on projected normalized margins; management reported that material reporting units passed the impairment tests. Defined-benefit pension plans were underfunded by $195, and a one-time $25–$30 settlement charge was estimated for two terminating plans.
Investor verification priorities
- Track whether AdvancePierre integration delivers expected synergies and whether acquisition-related costs or debt reduction differ from management’s plans.
- Compare realized Financial Fitness savings and restructuring charges with the stated FY2018–FY2020 targets.
- Monitor segment margins, particularly the recovery of Chicken and Prepared Foods profitability and continued Beef and Pork performance.
- Verify progress toward the approximately 2x net-debt/EBITDA goal, given FY2017’s 2.7x ratio and increased debt.
- Follow the disposition proceeds and any gain or further impairment from the planned non-protein business sales.
- Review developments in poultry antitrust, environmental, wage and other litigation, and assess the assumptions supporting Prepared Foods goodwill.