Business context and reporting period
Tyson Foods, Inc. is a protein and prepared-foods producer operating Chicken, Beef, Pork and Prepared Foods segments. This Form 10-K covers the 52-week fiscal year ended September 28, 2013; the filing also reports unaudited fourth-quarter results. Unless noted otherwise, figures are in U.S. dollars.
Financial performance
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Sales | $34.374 billion | $33.055 billion |
| Gross profit | $2.358 billion | $2.190 billion |
| Operating income | $1.375 billion | $1.286 billion |
| Income from continuing operations | $848 million | $614 million |
| Net income attributable to Tyson | $778 million | $583 million |
| Diluted EPS attributable to Tyson | $2.12 | $1.58 |
| Operating cash flow | $1.314 billion | $1.187 billion |
| Capital expenditures | $558 million | $690 million |
Sales increased 4%, primarily reflecting a 4.6% increase in average selling prices; volume fell 0.2%. Operating income rose 7% despite approximately $1.2 billion of higher input costs. Gross margin was approximately 6.9% and operating margin 4.0%, compared with approximately 6.6% and 3.9%, respectively, in FY 2012. Net interest expense fell to $138 million from $344 million, which included a $167 million pretax early-debt-extinguishment charge in FY 2012. FY 2013 continuing-operations effective tax rate was 32.6%, versus 36.4%.
Fourth-quarter FY 2013 sales were $8.894 billion, operating income $416 million, net income attributable to Tyson $261 million and diluted EPS $0.70. The comparable FY 2012 quarter reported sales of $8.315 billion, operating income of $354 million, net income attributable to Tyson of $185 million and diluted EPS of $0.51.
Segment results
| Segment | FY 2013 sales | Operating income | Operating margin | Change in operating income vs. FY 2012 |
|---|---|---|---|---|
| Chicken | $12.296 billion | $646 million | 5.3% | Up $162 million |
| Beef | $14.400 billion | $296 million | 2.1% | Up $78 million |
| Pork | $5.408 billion | $332 million | 6.1% | Down $85 million |
| Prepared Foods | $3.322 billion | $101 million | 3.0% | Down $80 million |
Chicken delivered record earnings, supported by demand, pricing and mix, operational execution and stronger foreign-produced operations; these gains absorbed a $470 million increase in feed costs. Beef improved on execution and export conditions despite tighter cattle supplies. Pork remained profitable but declined amid supply-demand imbalances and a swing from $66 million in commodity-derivative gains to $15 million in losses. Prepared Foods earnings were pressured by about $110 million of higher raw-material and other input costs, pricing lags and investment in growth platforms.
Financial position and capital allocation
At September 28, 2013, cash and cash equivalents were $1.145 billion, total debt $2.408 billion, shareholders’ equity $6.233 billion and total assets $12.177 billion. Debt-to-capitalization was 27.9%, down from 28.7%. Total liquidity was $2.104 billion, including $958 million available under the $1.0 billion revolving credit facility; the current ratio was 1.86. About 34% of cash was held by foreign subsidiaries. The company reported compliance with debt covenants.
Operating cash flow was $1.314 billion; capital spending was $558 million. Cash flow less capital expenditures was approximately $756 million. Tyson repurchased $550 million of shares under its program and paid $104 million in dividends. A $458 million convertible-note principal payment was made in October 2013 from cash on hand, after the fiscal year-end; the conversion premium was settled using shares and offsetting call options. The company had $14.2 million shares remaining authorized for repurchase at fiscal year-end.
Material changes, outlook and commentary
- Management forecast FY 2014 sales of approximately $36 billion and capital expenditures of approximately $700 million; expected net interest expense was approximately $100 million.
- Management expected overall domestic protein production to rise about 1%, and grain supplies to increase, potentially reducing input costs. Chicken feed costs were forecast to decline approximately $500 million; management expected Chicken margins at or above its 5%-7% normalized range.
- Beef profitability was expected to be similar to FY 2013 but potentially below its 2.5%-4.5% normalized range, with fed-cattle supplies expected to decline 2%-3%. Pork was expected within its 6%-8% normalized range; Prepared Foods could be slightly below its 4%-6% range as the company continued investing in growth.
- Tyson sold its Weifang operation in China in July 2013 after recording a $56 million impairment; the sale produced no significant gain or loss. Weifang is presented as a discontinued operation. FY 2013 discontinued-operation loss was $70 million, versus $38 million in FY 2012.
- The Dynamic Fuels joint-venture plant remained idle after maintenance and upgrades completed in December 2012. Tyson reported no impairment at year-end, but noted that prolonged idling, operating issues or unfavorable economics could prompt another impairment assessment.
- Other FY 2013 items included a $19 million currency-translation gain. The company acquired two value-added food businesses for $106 million, included in Prepared Foods.
- Key risks include volatile feed, livestock and other commodity costs; inability to pass cost increases through promptly; livestock disease, food safety and recalls; labor availability and wage-hour claims; export-market access, foreign exchange and geopolitical risks; customer concentration and bargaining power; leverage; and regulatory, environmental and litigation exposures. Wal-Mart accounted for 13.0% of FY 2013 sales.
Contingencies and governance matters
The filing describes multiple wage-and-hour cases, including judgments and appeals; certain cases had awards for unpaid wages and related damages. A Clean Water Act matter concerning a 2010 North Carolina spill was in settlement discussions with the U.S. Department of Justice. In a separate Oklahoma watershed case, the state sought more than $800 million in compensatory damages plus other relief; several damage claims had been dismissed, leaving injunctive-relief claims pending. Management stated that it had recorded appropriate accruals and did not expect these matters, beyond accrued amounts, to have a material effect, while acknowledging uncertain outcomes.
Tyson Limited Partnership and members of the Tyson family held approximately 72.46% of the voting power through the dual-class share structure. This concentration can allow substantial influence over shareholder matters and may constrain other shareholders’ ability to affect corporate decisions.
Important facts for investors to verify
- Whether FY 2014 sales, expected feed-cost relief and segment margin forecasts were achieved, especially given commodity-price and pricing-lag risks.
- Post-October 2013 cash, debt and liquidity after repayment of the $458 million convertible notes, and the effect of continued share repurchases and dividends.
- Results of the pending wage-hour litigation, Oklahoma watershed claims and DOJ environmental matter, including any changes to recorded reserves or exposure.
- Whether Dynamic Fuels resumed operations and whether its carrying value or the company’s other goodwill and long-lived assets required impairment.
- Progress and returns from Prepared Foods acquisitions and growth investments, and performance of foreign start-up operations.
- Customer concentration, livestock and feed input costs, export access, and any food-safety or disease developments.