Business context and reporting period
Tyson Foods, Inc. filed this unaudited Form 10-Q for fiscal 2013’s first quarter, the three months ended December 29, 2012. The company operates Chicken, Beef, Pork and Prepared Foods segments. Comparisons below are with the three months ended December 31, 2011, unless otherwise stated.
Financial performance
| Metric | Q1 FY2013 | Q1 FY2012 |
|---|---|---|
| Sales | $8.402 billion | $8.329 billion |
| Gross profit | $537 million | $493 million |
| Operating income | $300 million | $278 million |
| Net income attributable to Tyson | $173 million | $156 million |
| Diluted EPS | $0.48 | $0.42 |
| Operating cash flow | $190 million | $338 million |
| Capital expenditures | $157 million | $182 million |
- Sales rose 0.9%: average selling prices increased 4.7%, while sales volume declined 3.3%. Gross margin was approximately 6.4% of sales; operating margin was 3.6%.
- Interest expense declined to $37 million from $49 million. The effective tax rate increased to 36.3% from 35.8%.
- Operating cash flow fell, principally reflecting a $122 million working-capital outflow, versus a $9 million inflow a year earlier. Management attributed the current-period use mainly to higher inventory and lower accrued salaries and benefits.
- Cash and equivalents were $951 million at December 29, 2012, down from $1.071 billion at September 29, 2012. Total debt was $2.426 billion, including $519 million current and $1.907 billion long-term. Debt-to-total capitalization was 28.6%.
- Liquidity was reported at approximately $1.9 billion, including $951 million cash and $962 million available under the revolving credit facility. The current ratio was 1.89. The company was in compliance with debt covenants.
Material changes and segment results
- Chicken operating income increased to $107 million from $32 million; margin improved to 3.6% from 1.2%. Pricing, product mix and operational improvements helped offset a $170 million increase in feed costs.
- Beef operating income rose to $46 million from $31 million, with margin of 1.3% versus 0.9%. Reduced cattle processing and soft domestic demand were partly offset by supply-demand management.
- Pork operating income declined to $125 million from $165 million; margin was 9.2% versus 11.2%. Greater hog availability reduced livestock costs, but selling prices and sales volume also fell.
- Prepared Foods operating income fell to $33 million from $51 million; margin was 3.9% versus 5.9%. Lower prices, product mix and investment costs in the lunchmeat business weighed on results.
- SG&A increased to $237 million from $215 million. The company repurchased $115 million of Class A shares, including $100 million under its repurchase program, and paid $53 million in dividends. The quarterly dividend rate was increased 25%; special dividends were also paid.
Outlook, commentary and risks
- Management described results as strong despite higher input costs and challenging conditions, citing supply-demand balancing, margin management and operational improvements.
- For FY2013, Tyson expected sales of approximately $35 billion, capital expenditures of approximately $550 million and net interest expense of approximately $140 million. It expected overall domestic protein production to decline approximately 1% from FY2012.
- Chicken feed costs were expected to be approximately $600 million higher year over year; management anticipated the segment would return to normalized ranges in the second half. Beef was expected to remain profitable but potentially below its 2.5%–4.5% normalized margin range. Pork was expected to be at or above its 6%–8% range; Prepared Foods was expected within its 4%–6% range.
- The $458 million 3.25% convertible notes mature in October 2013. Management expected to use cash and/or operating cash flow for repayment of notes not converted before maturity. At quarter-end, early-conversion conditions had not been met; holders could convert at any time beginning July 15, 2013, under the terms described in the filing.
- Key exposures include drought-related grain costs, livestock availability and pricing, commodity and foreign-exchange volatility, food safety, disease outbreaks, labor and customer demand. The filing states that risk factors had not materially changed from the FY2012 Form 10-K.
- Contingencies include wage-and-hour litigation, including jury awards in the Garcia and Bouaphakeo matters; an Oklahoma environmental case seeking broad injunctive relief, with the previously asserted damages claims narrowed or dismissed; and EPA/DOJ discussions concerning alleged Clean Air Act compliance issues at 25 facilities. The company disputes claims and intends to defend them; ultimate outcomes remain uncertain.
Important facts for investors to verify
- Whether higher feed, cattle and other input costs are offset by pricing and efficiency improvements, particularly in Chicken and Beef.
- Whether working-capital needs and planned capital spending affect operating cash flow, liquidity or share repurchases.
- The refinancing or repayment plan and funding for the $458 million convertible notes due October 2013.
- Progress and financial exposure in wage-and-hour, environmental and regulatory proceedings, including any changes to accruals or settlement discussions.
- Performance against the company’s FY2013 sales, capital expenditure, interest expense and segment-margin outlook.