Tyson Foods, Inc. — Form 10-Q Summary
Business context and reporting period
Tyson Foods is a meat and prepared-foods producer operating Chicken, Beef, Pork and Prepared Foods segments. This filing covers the second quarter and first six months of fiscal 2011, ended April 2, 2011; comparisons are with periods ended April 3, 2010. Unless stated otherwise, amounts are in millions of dollars.
Financial results and key metrics
| Metric | Three months ended Apr. 2, 2011 | Prior-year quarter | Six months ended Apr. 2, 2011 | Prior-year six months |
|---|---|---|---|---|
| Sales | $8,000 | $6,916 | $15,615 | $13,551 |
| Gross profit | $533 | $564 | $1,277 | $1,093 |
| Operating income | $303 | $344 | $801 | $658 |
| Net income attributable to Tyson | $159 | $159 | $457 | $319 |
| Diluted earnings per share | $0.42 | $0.42 | $1.20 | $0.84 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $254 | $486 |
- Quarterly sales rose 15.7%, reflecting higher average prices (+12.3%) and volume (+3.0%). Higher input costs lifted sales but compressed quarterly gross margin to approximately 6.7% from 8.2%; operating margin fell to approximately 3.8% from 5.0%.
- For the first six months, sales increased 15.2%; gross margin was approximately 8.2% versus 8.1%, and operating margin approximately 5.1% versus 4.9%. Net income attributable to Tyson increased 43%.
- Quarterly segment operating income: Chicken $37 (down from $114); Beef $94 (down from $126); Pork $146 (up from $69); Prepared Foods $31 (down from $37). Reported quarterly segment margins were 1.4%, 2.8%, 10.5% and 4.0%, respectively.
- Six-month operating cash flow declined to $254 from $486, primarily reflecting a $552 working-capital cash use, chiefly higher inventory and receivables and lower accrued wages. Investing used $374, including $319 of capital spending; financing used $71.
- At April 2, 2011, cash was $794; current assets were $4,937 and current liabilities $2,479, for a 1.99 current ratio. Total debt was $2,495 ($390 current; $2,105 long-term), versus $2,536 at October 2, 2010. Cash plus $842 of available revolving capacity totaled $1,636 in reported liquidity.
- Dividends were unchanged at $0.040 per Class A share and $0.036 per Class B share for the quarter.
Material changes versus prior comparable periods
- Quarterly sales growth was more than offset at the gross-profit level by higher costs: cost of sales rose $1.1 billion, including approximately $593 million of higher live cattle and hog costs, $82 million of higher Chicken grain costs and $59 million of higher Prepared Foods raw-material costs.
- Quarterly operating income declined despite higher sales. Pork strength did not offset lower Chicken and Beef results; Prepared Foods also reported lower income.
- First-half operating income and Tyson-attributable net income improved, but operating cash flow was substantially lower as working-capital investment increased. Capital expenditures rose to $319 from $264.
- Interest expense fell to $63 for the quarter from $100 and to $129 for the six months from $180, reflecting lower average debt and lower prior-year note-repurchase losses. A $11 gain on sale of interests in an equity-method investment benefited first-half results; prior-year results included a $24 charge for repurchased-note losses in the quarter.
- Debt ratings improved during the period. S&P rated the company BBB- and Moody’s Ba1; the 2016 Notes’ coupon decreased to 6.85%. The amended $1.0 billion revolving credit facility was extended, subject to conditions, with maturity in February 2016; the company reported compliance with debt covenants.
Outlook, management commentary and risks
- Management forecast fiscal 2011 sales above $32 billion, capital expenditures of approximately $700 million and net interest expense of approximately $230 million. It planned to fund the $314 million of 8.25% Notes due October 2011 with cash on hand and/or operating cash flow, and expected to repurchase notes when attractively priced.
- Management expected domestic protein production to increase slightly, while exports could keep total domestic availability slightly below fiscal 2010, supporting pricing. It expected Chicken margins below the normalized range but the segment to remain profitable; higher grain costs were estimated at nearly $500 million for fiscal 2011. Approximately $200 million of Chicken operational improvements were expected during the year.
- Management expected Beef fundamentals to remain broadly stable, strong pork exports and Pork results above the normalized range for the remainder of the year, but below first-half levels. Prepared Foods pricing and operational improvements were expected to help offset higher input costs, with a lag before price increases take effect.
- Key business exposures include volatile livestock, grain and energy costs; the ability to pass costs through; supply, demand and export-market changes; foreign exchange and interest rates; food safety and disease outbreaks; labor and grower relationships; customer concentration; regulation and litigation. Commodity derivative fair values and related market movements can add earnings volatility.
- Legal and contingent matters include multiple wage-and-hour cases, including a March 2011 jury award of $503,011 in the Garden City, Kansas case; the Oklahoma poultry-litter case, in which remaining claims were narrowed substantially; and other grower and employment actions. Tyson said it had appropriate accruals and believed material loss beyond accrued amounts was remote, while noting outcomes remain uncertain.
- In February 2011 Tyson entered a two-year deferred prosecution agreement with the DOJ concerning FCPA matters, agreeing to a $4 million penalty and compliance and reporting measures. It also agreed to disgorge $880,786 and pay approximately $330,000 in prejudgment interest in the related SEC action.
- A minority partner in the Shandong Tyson Xinchang joint ventures may exercise put options beginning April 2011; the estimated purchase price at quarter-end would have been approximately $66 million. Separately, supplier cash-assistance receivables were $54 million, with a stated potential maximum obligation of approximately $215 million.
- Management stated that liquidity and capital resources were expected to be sufficient. The filing cautions that results may differ from outlook and identifies no material changes to the prior annual report’s risk factors.
Most important facts for investors to verify
- Whether higher input costs—particularly grain and livestock—can be passed through, and whether expected operational improvements materialize.
- Whether Pork profitability moderates as management expected, and whether Chicken remains profitable despite elevated grain costs.
- Working-capital requirements, cash generation and capital spending against the approximately $700 million fiscal-year plan.
- Funding and refinancing of the $314 million 2011 Notes, and the conditions governing the amended revolving facility’s effective maturity.
- Developments in wage-and-hour and other litigation, the DOJ/SEC compliance obligations, and any related cash costs beyond amounts disclosed.
- Exercise of the China joint-venture put options and recovery of supplier-program receivables.