Tyson Foods, Inc. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2014, ended June 28, 2014. Comparisons are with the periods ended June 29, 2013, except balance-sheet comparisons, which are with September 28, 2013. Amounts are in millions unless otherwise stated.
Business context and results
Tyson produces and markets chicken, beef, pork, prepared foods and related products through five reportable segments: Chicken, Beef, Pork, Prepared Foods and International. Management said quarterly results remained strong in Pork, Chicken and Beef, but were offset by losses in Prepared Foods and International.
| Metric | Q3 FY2014 | Q3 FY2013 | Nine months FY2014 | Nine months FY2013 |
|---|---|---|---|---|
| Sales | $9,682 | $8,731 | $27,475 | $25,480 |
| Gross profit | $637 | $682 | $1,973 | $1,689 |
| Operating income | $351 | $419 | $1,124 | $959 |
| Income from continuing operations attributable to Tyson | $260 | $253 | $727 | $587 |
| Net income attributable to Tyson | $260 | $249 | $727 | $517 |
| Diluted EPS attributable to Tyson | $0.73 | $0.68 | $2.05 | $1.42 |
| Operating margin | 3.6% | 4.8% | 4.1% | 3.8% |
Financial position, cash flow and liquidity
- Cash and liquidity: Cash was $587 at June 28, down from $1,145 at fiscal year-end. Including $959 available under the revolving facility and $2 of short-term investments, reported liquidity was $1,548. Current assets were $5,513 and current liabilities $2,612; the current ratio was 2.11.
- Debt: Total debt was $1,825 ($41 current and $1,784 long-term), versus $2,408 at September 28, 2013. Debt-to-total-capitalization was 21.4%, compared with 27.9%. The company reported compliance with debt covenants.
- Nine-month cash flow: Operating activities provided $543, down from $772; investing activities used $450; financing activities used $654. Cash decreased $558. Working-capital changes used $479, primarily reflecting higher inventory and receivables and lower taxes payable and accrued compensation.
- Capital spending and returns: Capital expenditures were $437 for the nine months. Tyson repurchased $286 of Class A shares and paid $76 of dividends. Management said it did not currently plan program repurchases beyond shares needed for equity-compensation obligations.
Material changes and segment performance
- Quarterly sales rose 10.9%, reflecting a 2.2% increase in volume and an 8.5% increase in average selling price. Higher prices largely reflected rising cattle, hog and Prepared Foods input costs; Chicken and International average prices declined.
- Quarterly operating income fell $68 despite higher sales. Cost of sales increased $996, including about $490 higher cattle costs, $265 higher hog costs, $95 higher Prepared Foods inputs and a $49 plant-closure impairment. Lower Chicken feed costs partly offset these pressures.
- Chicken: Operating income was $195, down $20; management cited outside-meat cost increases and disruptions at two facilities. Lower feed costs supported nine-month earnings.
- Beef: Quarterly operating income was $101, down $13, as higher cattle costs, lower volume and operating costs pressured results. Nine-month operating income increased to $194 from $134.
- Pork: Quarterly operating income rose to $128 from $67, supported by favorable supply conditions, demand, mix and execution.
- Prepared Foods: Quarterly operating loss was $50, including a $49 impairment for planned closure of three plants. Raw-material inflation, growth investment and lagged pricing also pressured results.
- International: Quarterly operating loss was $15, versus $5 of income, amid challenging conditions in Brazil and China and weaker pricing. Nine-month operating loss was $73.
- The reported Q3 effective tax rate was 16.8%, compared with 35.4% a year earlier. Management cited a $40 tax benefit, or $0.11 per diluted share, related to an unrecognized tax benefit; the filing also identifies expiration of statutes of limitation as a factor reducing the rate.
Outlook, transactions and notable items
- Management expected fiscal 2014 sales of approximately $38 billion, capital spending of $600–$650, and net interest expense of approximately $130. These estimates included assumptions about Hillshire acquisition financing and timing. Management said existing liquidity and resources were expected to be sufficient for operations.
- On July 1, 2014, Tyson entered into a merger agreement to acquire Hillshire Brands for $63 per share in cash. The estimated transaction value was $8.9 billion, including Hillshire net debt and a $163 termination fee. The tender offer was pending at the filing date and subject to shareholder-tender and regulatory conditions.
- To finance the acquisition, Tyson subsequently completed a $873 stock offering and a $1,454 tangible-equity-units offering on August 5. It also priced $3,250 of senior notes; the filing said closing was expected August 8. A $2,500 term-loan facility and a reduced $5,700 bridge facility were also described.
- Tyson announced an agreement to sell its Brazil and Mexico chicken operations to JBS for $575, subject to approvals and other closing conditions. The businesses had approximately $1 billion in annual sales; Tyson expected a gain and intended to use proceeds to reduce debt.
- Other unusual items included the $49 Prepared Foods impairment, $22 of Hillshire bridge-financing costs and $7 of third-party acquisition fees. Tyson sold its Dynamic Fuels interest for $30 cash, with up to $35 in contingent future payments, and recorded an approximately $3 gain.
Risks and contingencies
- Acquisition risks include failure to close, regulatory or shareholder litigation, financing and integration challenges, unachieved synergies, and significant transaction and integration costs. The financing could increase leverage and affect credit ratings.
- Key operating risks include volatile livestock, feed and other input costs; commodity and foreign-exchange movements; supply and demand shifts; disease outbreaks; labor availability; food safety; foreign-market access; and customer concentration or changing consumer preferences.
- Legal matters include multiple employee wage-and-hour suits, several with adverse trial judgments under appeal or other proceedings, and an Oklahoma environmental case seeking injunctive relief. The filing also disclosed a Missouri lawsuit and EPA criminal investigation concerning a May 2014 feed-supplement discharge and alleged fish kill; outcomes were uncertain.
- Potential guarantees include up to $55 for certain third-party obligations and $52 in lease residual-value guarantees; management did not consider material payments probable. Livestock-supplier assistance programs had a potential maximum obligation of approximately $310, with $19 in receivables and a $9 allowance recorded.
Important facts for investors to verify
- Whether the Hillshire tender offer and merger closed on the expected timeline, and the final acquisition price, financing mix, debt burden and integration costs.
- Whether the Brazil and Mexico asset sale received required approvals, closed as planned, and generated the expected proceeds and gain.
- Whether higher livestock and Prepared Foods input costs were passed through to customers promptly, and whether segment margins recovered—especially in Prepared Foods and International.
- Subsequent operating cash flow and working-capital trends, capital spending, liquidity, debt covenants and credit ratings following acquisition financing.
- Developments in the material employment, environmental and regulatory proceedings, particularly the Missouri investigation and outstanding wage-and-hour appeals.