TYSON FOODS, INC. annual report, FY2010

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Tyson Foods, Inc. — FY2010 Form 10-K

Reporting period: Fiscal year ended October 2, 2010 (52 weeks). The filing also reports fourth-quarter results; FY2009 had 53 weeks, which affects year-over-year comparisons. Amounts are in U.S. dollars.

Business context

Tyson produces, distributes and markets chicken, beef, pork and prepared foods through four segments: Chicken, Beef, Pork and Prepared Foods. The business is exposed to commodity and livestock costs, selling prices, supply-demand conditions, export access and operating efficiency. Wal-Mart represented 13.4% of FY2010 sales; exports totaled $3.2 billion.

Financial performance and liquidity

  • Sales: $28.43 billion, up 6.5% from $26.70 billion. Average selling prices rose 7.1%; volume declined 0.6%. Higher prices, particularly in Beef and Pork, drove growth.
  • Profitability: Gross profit was $2.514 billion versus $1.203 billion; operating income was $1.556 billion versus an operating loss of $215 million. Reported operating margin was 5.5%; management cited 5.4% excluding the $38 million insurance proceeds and $29 million Chicken goodwill impairment.
  • Net income and EPS: Net income attributable to Tyson was $780 million, or $2.06 diluted EPS, versus a $547 million loss, or $1.47 diluted loss per share, in FY2009. FY2010 included $61 million of losses on debt repurchases, a $29 million goodwill impairment, a $12 million equity-investment impairment and $38 million of insurance proceeds. FY2009 included a $560 million Beef goodwill impairment.
  • Segments: Operating income was Chicken $519 million (5.2% margin), Beef $542 million (4.6%), Pork $381 million (8.4%) and Prepared Foods $124 million (4.1%). Chicken, Beef and Pork improved substantially; Prepared Foods income fell from $133 million as higher raw-material costs offset higher prices and modest volume growth.
  • Cash flow and investment: Operating cash flow was $1.432 billion, up from $960 million. Capital expenditures were $550 million; net cash used in investing was $500 million. Cash declined $26 million to $978 million.
  • Debt and liquidity: Total debt fell to $2.536 billion from $3.477 billion after $956 million of senior notes were repurchased, retired or redeemed. Reported liquidity was $1.803 billion, including $978 million cash and $825 million available under the revolving facility. Current ratio was 1.81, down from 2.20.
  • Other metrics: Total assets were $10.752 billion and shareholders’ equity $5.201 billion. Goodwill was $1.893 billion. Class A annual dividend remained $0.16 per share; management expected to continue the dividend policy in FY2011.

Material changes and fourth-quarter results

Improved domestic protein-market conditions, margin management and operational efficiencies drove a nearly $1.2 billion improvement in operating income excluding the prior-year Beef goodwill impairment, according to management. FY2010 sales rose despite lower volume, while cost of sales increased $415 million, principally reflecting higher cattle and hog costs, Prepared Foods inputs, and commodity-risk-management results. The prior year’s 53rd week also complicates comparisons.

In the fourth quarter of FY2010, sales were $7.441 billion, operating income $391 million, net income attributable to Tyson $213 million and diluted EPS $0.57. The quarter included a $29 million non-cash impairment charge for an immaterial Chicken reporting unit. In FY2009’s fourth quarter, a $560 million non-cash Beef goodwill impairment contributed to the reported operating loss.

Outlook, risks and contingencies

  • FY2011 outlook: Management expected total domestic protein availability to be relatively flat, with overall protein production and exports increasing. It forecast higher grain costs for Chicken, with operational and pricing improvements expected to offset them; Beef cattle supplies down 1–2%, with strong exports; Pork supplies comparable to FY2010 and strong exports; and Prepared Foods improvements and pricing to more than offset higher input costs. Planned capital expenditures were approximately $700 million and net interest expense approximately $245 million. Management planned to use cash to repurchase notes when attractive and expected to fund the $315 million 2011 Notes balance from cash and operating flows.
  • Principal operating risks: Volatile feed-grain, livestock, energy and other input costs; inability to pass cost increases through to customers; disease outbreaks, food-safety events and recalls; export restrictions, currency and geopolitical exposure; labor and grower availability; customer concentration and customer bargaining power; and leverage, interest costs and covenant restrictions. Corn and soybean meal represented about 42% of the cost of growing a live chicken.
  • Debt and commitments: The $1.0 billion revolving facility matures in March 2012, but could mature July 3, 2011 if the 2011 Notes are not refinanced, purchased or defeased by July 3, 2011. The company reported covenant compliance. Contractual commitments totaled $5.238 billion, including $2.641 billion of debt and capital-lease principal, $785 million of interest and $944 million of purchase obligations.
  • Legal and other contingencies: The Oklahoma poultry-litter case sought more than $800 million and broad injunctive relief; several damages claims were dismissed or narrowed, and the remaining matter proceeded on injunctive relief. Wage-and-hour litigation includes a multi-district action with about 13,800 opt-in employees and additional possible reaffirmed consents, plus separate cases. A poultry-grower jury verdict of about $8.7 million was being challenged on appeal. Mexican authorities asserted a water-use claim of about 55.9 million pesos (approximately $4.6 million), which the subsidiary appealed. Management said it believed appropriate accruals had been made, but outcomes remain uncertain.
  • Unusual developments: Dynamic Fuels, the 50/50 renewable-fuels venture consolidated by Tyson, completed facility construction late in FY2010 and began initial production in October 2010. Tyson disclosed a continuing review of payments by a Mexican subsidiary to individuals employed by government bodies; the payments had stopped in 2006, and the company said it did not expect a material financial impact. Potential greenhouse-gas regulation remained uncertain.

Most important facts for investors to verify

  • Whether FY2011 segment margins and the expected offset to higher grain and other input costs were achieved.
  • Cash-flow durability, working-capital needs, the $700 million capital-spending plan and progress in reducing debt and interest expense.
  • Repayment or refinancing of the 2011 Notes and the revolving-facility maturity provisions, along with covenant headroom.
  • Developments, accruals and potential exposure in wage-and-hour, environmental, grower and Mexican water-use matters.
  • Customer concentration, export-market access, commodity hedging volatility and the operational and financial performance of Dynamic Fuels.

The independent auditor issued an unqualified opinion on the FY2010 financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.