Tyson Foods, Inc. — Q1 FY2014 Form 10-Q
Reporting period: Three months ended December 28, 2013; comparable period ended December 29, 2012. Dollar figures are in millions unless noted.
Business context and results
Tyson operates Chicken, Beef, Pork and Prepared Foods businesses. Management said operating income rose 36%, led by record Chicken segment earnings, and cited continued focus on value-added growth, margin management and operating efficiency.
| Metric | Q1 FY2014 | Q1 FY2013 |
|---|---|---|
| Sales | $8,761 | $8,366 |
| Gross profit | $685 | $539 |
| Operating income | $412 | $304 |
| Income from continuing operations attributable to Tyson | $254 | $177 |
| Diluted EPS attributable to Tyson | $0.72 | $0.49 |
| Operating cash flow | $361 | $190 |
| Capital expenditures | $140 | $157 |
- Sales increased 4.7%, reflecting 2.5% higher volume and 2.4% higher average selling prices. Gross margin was approximately 7.8%, versus 6.4%; operating margin was 4.7%, versus 3.6%.
- Segment operating income: Chicken $225 (up from $111); Beef $58 (up from $46); Pork $121 (down from $125); Prepared Foods $16 (down from $33). Segment margins were 7.5%, 1.6%, 8.5% and 1.8%, respectively.
- Chicken benefited from lower feed costs, higher volume and operational improvements; international operations recorded approximately $28 of losses. Beef improved on execution and demand despite tight cattle supplies and high cattle costs. Pork earnings eased amid lower volume. Prepared Foods faced higher input costs and investment costs, with pricing adjustments subject to a lag.
- Cash from operations improved, with working capital changes providing $67 versus using $122 in the prior period. The current-period figure includes a $92 noncash convertible-debt discount adjustment. Investing used $144; financing used $540, including debt payments, $159 of share repurchases and $25 of dividends.
Financial position and liquidity
- At December 28, cash was $825, total debt was $1,942 ($52 current and $1,890 long-term), and shareholders’ equity was $6,316. Debt was down from $2,408 at September 28, 2013.
- Tyson paid the $458 principal of its 3.25% convertible notes at maturity in October 2013 and settled the conversion premium with shares. Debt-to-total-capitalization was 23.5%, down from 27.9%; the company reported compliance with debt covenants.
- Reported liquidity was approximately $1.79 billion: $825 cash, $1 of short-term investments and $964 available under its $1.0 billion revolving facility. The current ratio was 2.01. About 52% of cash was held in foreign subsidiaries; management said it generally does not rely on that cash for ongoing U.S. liquidity needs.
Outlook, risks and unusual items
- FY2014 outlook: sales approximately $36 billion; capital expenditures approximately $700; net interest expense approximately $100. Management expected liquidity to remain well above its $1.2 billion goal and anticipated continued share repurchases.
- Management expected domestic protein production to rise about 1% and grain supplies to increase. Chicken was expected to be at or above its normalized 5%–7% margin range, with feed costs approximately $600 lower than FY2013 based on then-current futures. Beef profitability was expected to approximate FY2013 but could fall below its 2.5%–4.5% normalized range; Pork was expected within its 6%–8% range; Prepared Foods could be slightly below its 4%–6% range.
- Q1 included a $6 impairment charge on an available-for-sale equity security, partly offset in other income by joint-venture earnings and foreign-exchange gains. The prior-year period included a $4 after-tax loss from the Weifang operation, which had been sold in July 2013 and reported as discontinued.
- Risks highlighted include volatile livestock, feed and other input costs; supply-demand imbalances; foreign-market access and currency exposure; animal disease, food safety and regulation; labor availability and employment claims; customer concentration; leverage and interest rates; and litigation. Tyson said no material changes had been made to the risk factors in its FY2013 Form 10-K.
- Contingencies include wage-and-hour litigation involving plant employees. Several cases had adverse verdicts or judgments under appeal; notably, on January 30, 2014, after quarter-end, a judgment of approximately $18.8 was entered in the Acosta case. Oklahoma’s poultry-litter watershed case seeks broad injunctive relief, while major damages claims described in the filing had been dismissed; the trial court had not yet ruled on the remaining case. The DOJ was pursuing civil penalties over a 2010 North Carolina spill, with settlement discussions underway.
- Other disclosed potential exposures include up to $54 of guarantees of third-party grower loans, up to $49 of lease residual-value guarantees, and a maximum potential obligation of approximately $310 under livestock supplier assistance programs; recorded program receivables were $42, net of a $14 allowance.
Important facts for investors to verify
- Whether lower feed costs and Chicken’s strong margins persist, and whether the forecast $600 FY2014 feed-cost benefit is realized.
- Beef and Prepared Foods margin performance against management’s outlook, including the effects of livestock and raw-material costs and delayed pricing recovery.
- Cash generation and liquidity quality, including foreign-held cash, working-capital movements and the effect of repurchases and capital spending.
- Developments and potential costs in wage-and-hour litigation, the Oklahoma environmental case and the North Carolina Clean Water Act matter.
- Progress against the $36 billion sales, $700 capital-spending and $100 net-interest outlook, and the impact of the enlarged share-repurchase authorization.