Tyson Foods, Inc. — Fiscal 2019 Third-Quarter Form 10-Q
Reporting period: Three and nine months ended June 29, 2019, compared with the periods ended June 30, 2018. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context and results
Tyson is a protein and food products company with Beef, Pork, Chicken and Prepared Foods reportable segments. Sales growth in the quarter was driven primarily by acquisitions, including Keystone Foods; lower average prices partly offset higher volumes. The company acquired BRF S.A.’s Thai and European operations on June 3, 2019.
| Metric | Three months | Nine months |
|---|---|---|
| Sales | $10,885; up 8.3% year over year | $31,521; up 4.9% |
| Gross profit | $1,336, versus $1,299 | $3,883, versus $3,757 |
| Operating income | $781, versus $797 | $2,223, versus $2,213 |
| Net income attributable to Tyson | $676, versus $541 | $1,653, versus $2,487 |
| Diluted earnings per share | $1.84, versus $1.47 | $4.51, versus $6.72 |
| Operating cash flow | $1,535, versus $1,924 for the comparable nine months |
Financial position, cash flow and liquidity
- Cash and cash equivalents were $406 at June 29, 2019, compared with $270 at September 29, 2018. Total debt was $12,586, up from $9,873; net debt was $12,179, compared with $9,602.
- Net debt to EBITDA was 2.9x, versus 2.4x at September 29, 2018. The company reported compliance with all debt covenants.
- Reported liquidity was $1,462, including cash, short-term investments and available revolving-credit capacity after commercial paper. The company had $695 of commercial paper outstanding and no revolving-facility borrowings.
- Current assets were $7,433 and current liabilities $5,597; the current ratio was 1.33, versus 1.13 at fiscal year-end.
- Operating cash flow declined year over year, partly reflecting a $1,021 use of cash from changes in operating assets and liabilities, including higher inventory and receivables. Investing used $3,335, including $2,461 for acquisitions and $971 for capital expenditures. Financing provided $1,932.
- Quarterly operating margin was 7.2%. Segment margins were Beef 6.5%, Pork 3.2%, Chicken 6.9% and Prepared Foods 11.0%. Gross margin was approximately 12.3%, versus 12.9% a year earlier.
Material changes versus prior periods
- Quarterly operating income decreased slightly despite higher sales; the comparison included record Beef results in the prior-year quarter. For the nine months, operating income was slightly higher.
- Chicken sales rose with acquisition-related volume, while lower average sales prices and weaker year-to-date operating income reflected product mix, market conditions and costs. Pork operating income declined in both comparisons amid excess supply and higher hog costs in the quarter. Beef operating income fell in the quarter but increased year to date. Prepared Foods year-to-date operating income improved, while sales volumes were affected by prior-year divestitures.
- Quarterly Tyson-attributable earnings included a $55 pretax gain on sale of an investment and a $105 after-tax benefit from reversal of previously unrecognized tax benefits. Year-to-date earnings also included $37 of Keystone acquisition and purchase-accounting costs and $31 of restructuring charges.
- Year-to-date 2018 earnings included a $1,003 after-tax deferred-tax remeasurement benefit, among other items, which materially affects the year-over-year net income comparison. The 2018 period also included a $109 employee bonus and $79 of impairment charges, net of a divestiture gain.
Outlook, management commentary, risks and contingencies
- Management said it expected fiscal 2019 capital spending of approximately $1.3 billion and net interest expense of approximately $450. It stated that current liquidity and capital resources should be sufficient for operations. The filing does not provide a clear full-year earnings or revenue guidance figure.
- Management cited trade and tariff uncertainty affecting domestic and export prices, particularly for chicken and pork; increased labor and operating costs across segments; and efforts to recover higher costs through pricing. It also noted challenging pork conditions, chicken supply availability and continued strong Prepared Foods demand.
- Key risks include commodity and livestock price volatility, feed costs, trade and market access, labor availability, food safety and animal disease, acquisition integration and leverage. The company was implementing its ERP system in phases; it reported no material effect on internal financial controls to date.
- Material legal matters include poultry, pork and cattle antitrust litigation, with a DOJ investigation and subpoenas concerning the chicken industry. The company said it was cooperating. It also disclosed litigation and an expected civil penalty following a wastewater release at a recently acquired Alabama facility; other significant matters include a Philippines labor award under appeal and an appealed asbestos verdict.
- The Financial Fitness Program had incurred $240 of an estimated $253 in cumulative pretax charges through June 29, 2019. Remaining charges were expected mainly to relate to technology implementation.
Important facts for investors to verify
- How much sales growth and future earnings depend on acquired businesses, and whether integration produces the expected benefits.
- Whether segment margins recover, particularly in Pork and Chicken, given livestock costs, product mix, market supply and trade-related uncertainty.
- Debt refinancing and repayment needs, leverage trends, cash conversion and working-capital requirements.
- The sustainability of earnings excluding the investment-sale gain and tax-reserve reversal, and the unusual prior-year tax benefit affecting comparisons.
- Developments in antitrust investigations and litigation, the Alabama wastewater matter and other disclosed contingencies.