Tyson Foods, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter ended July 2, 2016, with comparisons to the quarter ended June 27, 2015. The filing also reports the first nine months of fiscal 2016. Amounts are in millions except per-share data.
Business context and results
Tyson operates Chicken, Beef, Pork and Prepared Foods segments. Third-quarter sales fell 6.6%, primarily due to lower beef prices and the prior-year sale of its Mexico chicken operations; excluding that sale, company sales volume increased 0.3%. Management cited record Chicken results, a strong recovery in Beef and continued strong Pork and Prepared Foods performance.
| Metric | Q3 2016 | Q3 2015 | First 9 months 2016 | First 9 months 2015 |
|---|---|---|---|---|
| Sales | $9,403 | $10,071 | $27,725 | $30,867 |
| Gross profit | $1,224 | $986 | $3,608 | $2,931 |
| Operating income | $767 | $563 | $2,247 | $1,619 |
| Net income attributable to Tyson | $484 | $343 | $1,377 | $962 |
| Diluted EPS | $1.25 | $0.83 | $3.50 | $2.32 |
| Operating margin | 8.2% | 5.6% | 8.1% | 5.2% |
Financial position, cash flow and capital allocation
- For the first nine months, operating cash flow was $1,873, up from $1,672 a year earlier. Capital expenditures were $515; fiscal 2016 capital spending was expected to be approximately $725.
- Cash and cash equivalents were $197 at July 2, 2016, down from $688 at October 3, 2015. Total debt was $6,178, including $79 current debt; net debt was $5,977. Net debt to EBITDA was 1.7x, versus 2.1x at fiscal year-end.
- Reported liquidity was approximately $1,294, comprising cash, short-term investments and $1,093 available under the revolving credit facility. The current ratio was 1.80, versus 1.52 at fiscal year-end. The company reported compliance with debt covenants.
- Financing cash use included $1,293 of Class A share repurchases and $162 of dividends. The company repaid $638 of 2016 Notes and had $150 outstanding on its revolver. Through August 5, it repurchased a further $380 of stock.
- Management expected fiscal 2016 net interest expense of approximately $245. The filing states that current liquidity and capital resources are expected to be sufficient for operations.
Material changes and segment performance
- Lower input costs and improved execution lifted results. Third-quarter cost of sales declined $906, including an estimated $640 reduction in live cattle costs and $50 reduction in Chicken feed costs; net realized derivative gains were also higher year over year.
- Chicken operating income rose to $380 from $313, with a 13.9% margin and record quarterly results, supported by lower feed costs and operational execution.
- Beef improved to $91 operating income from a $7 loss, as higher cattle availability reduced livestock costs; lower beef prices weighed on sales.
- Pork operating income rose to $122 from $64, reflecting better plant utilization and favorable market conditions. Management said the segment’s margin was above its normalized range.
- Prepared Foods operating income was $197 versus $207. Nine-month income increased to $601 from $438, benefiting from lower input costs and $322 of synergies; higher promotional spending and investment in innovation partly offset benefits.
- Hillshire integration and legacy Prepared Foods profit-improvement initiatives had generated $415 of synergies in fiscal 2016 through nine months. The company estimated their combined positive impact at approximately $700 in fiscal 2017, with most expected in Prepared Foods.
Outlook, risks and unusual items
- Management expected domestic protein production to increase 2–3% for fiscal 2016 and described export market conditions as challenging. No specific full-year earnings-per-share guidance is stated in the supplied filing text.
- Third-quarter net income included $15, or $0.04 per diluted share, from recognition of tax benefits and an audit settlement; the nine-month amount was $27, or $0.07 per diluted share.
- Key exposures include livestock, feed and other commodity price and availability; foreign market access and currency; animal disease; food safety and recalls; labor and grower relationships; customer concentration and demand shifts; litigation; regulation; leverage and interest rates; and operational or technology disruptions. Commodity derivatives are used to manage some exposures but can add earnings volatility.
- Legal matters include a wage-and-hour class action for which the U.S. Supreme Court affirmed the appellate ruling and remanded for allocation of a $5.8 million award; plaintiffs also sought approximately $2.7 million in fees. A separate Philippines labor matter remains pending for non-settling claimants after a proposed settlement was rejected; a settlement covering about 18% of claimants received approval subject to further proceedings.
- The company disclosed an EPA notice alleging California truck-emissions violations and an EPA criminal investigation related to a 2014 feed-supplement discharge in Missouri. Tyson said it was cooperating; the filing does not establish the outcome of the investigation. It also reported that the Oklahoma poultry-litter case remained undecided.
Important facts for investors to verify
- Whether lower livestock and feed costs, favorable segment conditions and elevated Pork margins persist, and how commodity hedges affect reported results.
- Progress against the approximately $700 fiscal 2017 synergy and profit-improvement estimate, including the costs of brand investment and promotional activity.
- Cash generation and liquidity after substantial repurchases, dividends, debt repayments and planned capital spending; also monitor debt maturities and covenant headroom.
- Developments in the wage-and-hour, Philippines labor, environmental and other legal matters, including any change in the company’s assessment of potential losses.
- Whether the expected 2–3% domestic protein production growth and challenging export conditions change demand, pricing or segment profitability.