Tyson Foods, Inc. — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2013, ended March 30, 2013. Comparative periods ended March 31, 2012. Amounts are in millions except per-share data.
Business context and results
Tyson produces and markets chicken, beef, pork and prepared foods. It reported higher input costs and difficult market conditions across all segments during the quarter. Sales rose, but operating income and earnings declined.
Key financial metrics
| Metric | Three months | Six months |
|---|---|---|
| Sales | $8,419, up 1.8% year over year | $16,821, up 1.3% |
| Gross profit | $408 vs. $535 | $945 vs. $1,028 |
| Operating income | $174 vs. $302 | $474 vs. $580 |
| Net income attributable to Tyson | $95 vs. $166 | $268 vs. $322 |
| Diluted EPS | $0.26 vs. $0.44 | $0.74 vs. $0.86 |
| Operating margin | 2.1% vs. 3.7% | 2.8% vs. 3.5% |
| Operating cash flow | $40 generated in Q2 | $230 vs. $454 |
Six-month capital expenditures were $290, compared with $344. Working capital changes used $336 of cash, principally reflecting higher inventory and receivables and lower accrued payroll and payables. Cash and equivalents were $762 at quarter-end, down from $1,071 at fiscal year-end. Total debt was $2,416, including $512 current debt; debt-to-total capitalization was 28.3%. Liquidity was approximately $1.8 billion, including $958 available on the revolver and $47 of short-term investments. The current ratio was 1.94.
Segment performance and changes
- Chicken: Q2 sales rose to $3,094, while operating income fell to $78 from $145. Results included a $56 impairment charge for non-core assets in China; the reported Q2 margin was 2.5%, or 4.3% excluding that charge. Higher feed costs were partly offset by pricing, mix and operating improvements.
- Beef: Q2 operating loss widened to $26 from $1. Management cited volatile conditions, tight regional cattle availability, weaker premium-beef demand and higher operating costs. Six-month operating income was $20 vs. $30.
- Pork: Q2 operating income declined to $72 from $115, amid higher hog supplies, less favorable pricing and lower exports. Six-month income was $197 vs. $280.
- Prepared Foods: Q2 operating income declined to $28 from $44, reflecting product mix, weaker foodservice demand and investment in the lunchmeat business. Six-month income was $61 vs. $95.
Higher average prices lifted Q2 sales by $221, while lower volume reduced sales by $70. Cost of sales increased $278, including $311 of higher input costs and the $56 China impairment, partly offset by lower volume. For the six months, higher input costs included $335 of additional chicken feed costs and $265 of additional live-cattle costs.
Outlook, liquidity and notable items
- Fiscal 2013 sales guidance was approximately $34.5 billion; capital expenditures were expected at $550–$600; net interest expense at approximately $140.
- Management expected domestic protein production to increase about 1% year over year. Chicken feed costs were forecast to be approximately $450 higher for the year; management expected chicken margins to return to the 5%–7% normalized range in the second half.
- Management expected Beef to remain profitable but below its 2.5%–4.5% normalized range; Pork within its 6%–8% range; and Prepared Foods potentially below its 4%–6% range.
- The $458 of 3.25% convertible notes mature in October 2013. Conditions for early conversion were met, allowing conversion in Q3; Tyson said it planned to use cash on hand and/or operating cash flow for payment. The company had $762 cash and $958 of revolver availability at quarter-end.
- Q2 and six-month results included a $56 China impairment charge and a $19 currency-translation gain from final resolution of the company’s Canadian investment.
- Tyson repurchased $188 of Class A shares and paid $70 in dividends during the first six months. The quarterly dividend rate had increased 25%; 28 million shares remained authorized for repurchase.
Risks, contingencies and controls
Key business risks include volatile livestock, feed and energy costs; supply and demand imbalances; customer and product demand; export access and foreign exchange; food safety, labor and regulatory matters; and litigation. Tyson reported compliance with debt covenants and effective disclosure controls.
Material contingencies include wage-and-hour litigation, with adverse jury verdicts in certain cases under appeal or awaiting damages determinations; an Oklahoma environmental case seeking broad injunctive relief, with the original damages claims described as dismissed; and supplier cash-flow assistance programs with a potential maximum obligation of approximately $290. Related receivables were $54, net of a $16 allowance. Tyson also reached a proposed EPA/DOJ settlement involving $3.95 in civil penalties and $0.3 in environmental projects; the consent decree remained subject to court entry.
Investor verification priorities
- Track cash generation and working-capital needs against planned capital spending, repurchases and dividends.
- Monitor funding or conversion of the $458 October 2013 notes and the company’s liquidity after settlement.
- Compare segment results with outlook, especially chicken feed-cost recovery, cattle availability and Beef profitability, and Prepared Foods demand.
- Review subsequent developments in wage-and-hour and environmental litigation, supplier receivables and the proposed EPA/DOJ settlement.
- Assess the recurring earnings impact of the China impairment and Canadian currency-translation gain separately from reported results.