Tyson Foods, Inc. — Fiscal 2015 Second-Quarter Form 10-Q
Reporting period: Quarter ended March 28, 2015; comparisons are with the quarter ended March 29, 2014. Six-month figures cover the first half of fiscal 2015. Amounts are in millions except per-share data.
Business context and results
Tyson operates Chicken, Beef, Pork, Prepared Foods and International segments. Hillshire Brands, acquired in August 2014, is included in Prepared Foods; accordingly, reported growth versus the prior year is not fully comparable on an organic basis.
| Metric | Q2 FY2015 | Q2 FY2014 | First half FY2015 | First half FY2014 |
|---|---|---|---|---|
| Sales | $9,979 | $9,032 | $20,796 | $17,793 |
| Gross profit | $989 | $651 | $1,945 | $1,336 |
| Operating income | $547 | $361 | $1,056 | $773 |
| Net income attributable to Tyson | $310 | $213 | $619 | $467 |
| Diluted EPS | $0.75 | $0.60 | $1.49 | $1.32 |
Q2 sales rose 10.5%, operating income 52%, and Tyson-attributable net income about 46%. Gross margin was 9.9% versus 7.2%; operating margin was 5.5% versus 4.0%. For the first half, sales increased 16.9% and Tyson-attributable net income increased about 33%.
Segments and material changes
- Prepared Foods: Q2 sales were $1,871 and operating income $160, versus $861 and $21 a year earlier. Hillshire acquisition volumes, improved mix, legacy-business cost reductions, and synergy initiatives contributed significantly.
- Chicken: Q2 operating income increased to $332 from $234, supported by improved mix and $75 of lower feed costs.
- Beef: Q2 operating loss was $20, compared with $35 of income. Tight cattle supplies and higher fed-cattle costs could not be fully passed through amid weaker seasonal demand and competition from other proteins.
- Pork: Q2 operating income was $99 versus $107. Management described results as strong, despite lower average prices and sales volumes.
- International: Q2 operating loss narrowed to $15 from $30, but weak Chinese demand remained challenging. Lower sales also reflected the Brazil divestiture.
Cash flow, debt and liquidity
- First-half operating cash flow was $808, compared with $265. Investing activities used $291, including $435 of capital expenditures and $142 of proceeds from the Brazil business sale. Financing activities used $721. Cash declined by $215 to $223.
- At March 28, total debt was $7,674, down from $8,178 at fiscal year-end; cash was $223. Current debt was $1,236 and long-term debt $6,438. Management reported net debt to EBITDA of 3.3x, down from 4.1x.
- Reported liquidity was approximately $1,294, including $223 cash, $2 of short-term investments and $1,069 available under the $1.25 billion revolving credit facility. The current ratio was 1.40 versus 1.64 at September 27, 2014. Tyson was in compliance with debt covenants.
- The company repaid term-loan debt and made net revolver borrowings during the half. On April 7, 2015, after quarter-end, it entered into a $500 term loan due in 2018 to refinance existing term-loan borrowings.
Outlook, commentary and risks
- Management estimated that Hillshire synergies and the legacy Prepared Foods improvement plan would benefit results by more than $250 in fiscal 2015, $400 in fiscal 2016 and $600 by fiscal 2017. It reported capturing $77 in Q2 and $137 in the first half.
- Fiscal 2015 capital spending was expected to be approximately $900; net interest expense was expected to be approximately $280. Management said existing liquidity and expected operating cash flows should be sufficient for business needs.
- The planned Mexico operation sale to JBS remained subject to government approval; management expected a decision during fiscal 2015 and said a gain would result if the sale was completed. The Brazil sale was completed in Q1.
- Q2 results included $8 of net insurance proceeds related to a legacy Hillshire plant fire and $14 of Hillshire merger and integration costs. First-half results included $28 of net fire-related costs, $33 of merger and integration costs, and a $26 tax benefit from recognition of previously unrecognized tax benefits.
- Risks include volatile livestock, feed and other input costs; foreign-market and currency conditions; food-safety and operational disruptions; leverage and interest rates; and litigation. The filing describes multiple employee wage-and-hour lawsuits and an EPA criminal investigation concerning a 2014 plant incident; the outcome of the investigation was uncertain. Management considered the possibility of a material loss beyond recorded legal accruals remote, but noted outcomes remain uncertain.
Important facts for investors to verify
- How much reported sales and profit growth reflects Hillshire consolidation versus organic growth, and whether the projected integration synergies are being achieved.
- Whether cattle-cost pressure and weak demand continue to weigh on Beef, and whether challenging China conditions persist.
- Progress on the Mexico sale, including required approvals, proceeds and any resulting gain.
- Debt repayment, liquidity and cash conversion relative to planned capital spending, dividends and share repurchases.
- Developments in the EPA investigation and material wage-and-hour or other legal proceedings, including any change in estimated exposure.