Tyson Foods, Inc. — Q2 FY2014 Form 10-Q
Reporting period: Quarter ended March 29, 2014; comparisons are with the quarter ended March 30, 2013. Six-month results compare the first half of FY2014 with the first half of FY2013. Financial statements are unaudited; amounts below are in millions except per-share data.
Business context and financial performance
Tyson produces and markets chicken, beef, pork, prepared foods and related products. It reports five segments: Chicken, Beef, Pork, Prepared Foods and International. International became a separate reportable segment in Q2; prior periods were reclassified.
| Metric | Q2 FY2014 | Q2 FY2013 | First half FY2014 | First half FY2013 |
|---|---|---|---|---|
| Sales | $9,032 | $8,383 | $17,793 | $16,749 |
| Gross profit | $651 | $468 | $1,336 | $1,007 |
| Operating income | $361 | $236 | $773 | $540 |
| Net income attributable to Tyson | $213 | $95 | $467 | $268 |
| Diluted EPS attributable to Tyson | $0.60 | $0.26 | $1.32 | $0.74 |
| Operating margin | 4.0% | 2.8% | 4.3% | 3.2% |
Q2 sales grew 7.7%: volume contributed 2.8% and average selling price 5.2%. Operating income increased 53%. Q2 gross margin was approximately 7.2%, versus 5.6% a year earlier. The FY2013 comparison included a $62 million after-tax discontinued-operation loss in Q2 (Weifang, China); it was sold in July 2013. The prior-year period also included a $19 million currency-translation gain in other income.
Segment performance, Q2: Chicken operating income rose to $234 from $143, supported by demand, operational improvements and lower feed costs. Beef earned $35 versus a $26 loss, despite record-high fed-cattle costs and tight supplies. Pork income increased to $107 from $72, with favorable mix and lower total pork supplies. Prepared Foods income declined to $21 from $28 as raw-material costs and growth investment weighed on results. International lost $30 versus a $3 loss amid weak conditions in Brazil and China.
Cash flow, balance sheet and liquidity
- First-half operating cash flow was $265, versus $230; working capital used $367, primarily reflecting higher inventory and receivables and lower accrued balances.
- Investing cash outflow was $344, including $293 of capital expenditures and a $56 acquisition. Financing cash outflow was $633, including $390 of debt payments and $275 of Class A share repurchases. Cash fell by $707 to $438.
- At March 29, total debt was $1,940, down from $2,408 at fiscal year-end, following repayment at maturity of $458 of convertible notes. Shareholders’ equity was $6,464. Debt-to-total capitalization was 23.1%, versus 27.9% at September 28, 2013.
- Liquidity was approximately $1.4 billion: $438 cash, $2 short-term investments and $955 available under the $1.0 billion revolving facility. The current ratio was 2.07. Tyson reported compliance with debt covenants.
Outlook, commentary and risks
Management forecast FY2014 sales of approximately $37 billion, capital expenditures of $650–$700 million and net interest expense of approximately $95 million. It expected liquidity to remain above its $1.2 billion goal and planned to continue share repurchases. Outlook by segment: Chicken margin above its 5%–7% normalized range, aided by an estimated $500 million reduction in feed costs; Beef profitability similar to FY2013 and below its 2.5%–4.5% range; Pork within its 6%–8% range; Prepared Foods below its 4%–6% range due to investment and input costs; and International losses continuing, but expected to be lower in Q3 and Q4 than in the first half. Forecasts depend on commodity prices, supplies, demand, markets and execution.
Key exposures include volatile cattle, hog, feed and other input costs; supply and pricing conditions; foreign-market access and currency; animal disease; labor and food-safety matters; customer concentration; regulation; and litigation. Tyson identified multiple wage-and-hour suits, with judgments and appeals in several cases, and an Oklahoma environmental case seeking broad injunctive relief (the state’s original damages claims were narrowed or dismissed). The DOJ was seeking civil penalties over an alleged Clean Water Act violation relating to a 2010 North Carolina spill; settlement discussions were ongoing. Management stated other outstanding matters were not expected to materially adversely affect results or financial position, while noting outcomes remain uncertain.
Other notable items: the company acquired a value-added food business for $56 million; first-half repurchases included $250 million under the program, and the board authorized an additional 25 million shares. The effective tax rate rose to 38.3% in Q2 from 23.9%, with the filing citing state taxes, the domestic production deduction and foreign losses for which no benefit was recognized.
Investor verification priorities
- Assess sustainability of earnings growth, particularly Chicken and Pork performance, and the impact of rising livestock costs on Beef and Prepared Foods.
- Track International losses and whether management’s expected improvement in the second half materializes.
- Reconcile operating cash generation with working-capital needs, planned capital spending, repurchases and the liquidity target.
- Monitor commodity-hedge exposure and mark-to-market volatility, tax-rate developments, and the outcome or estimated financial exposure of material legal matters.
- Compare FY2014 guidance with subsequent results, including segment margin expectations and forecast feed-cost savings.