Tyson Foods, Inc. — Fiscal 2019 First-Quarter 10-Q
Reporting period: Three months ended December 29, 2018; compared with the three months ended December 30, 2017. Amounts are in millions, except per-share data, percentages, and ratios.
Business context and results
Tyson is a protein producer operating in Beef, Pork, Chicken, and Prepared Foods. Management said operating income remained strong but was below the prior-year record. Results included the November 30, 2018 acquisition of Keystone Foods, whose post-acquisition income-statement contribution was described as insignificant.
| Metric | Q1 FY2019 | Q1 FY2018 |
|---|---|---|
| Sales | $10,193 | $10,229 |
| Gross profit | $1,355 | $1,443 |
| Operating income | $807 | $922 |
| Income before taxes | $713 | $842 |
| Net income attributable to Tyson | $551 | $1,631 |
| Diluted EPS | $1.50 | $4.40 |
| Operating cash flow | $868 | $1,126 |
Gross margin was approximately 13.3% versus 14.1%; operating margin was 7.9% versus 9.0%. The prior-year earnings comparison is materially affected by a $994 million after-tax benefit from remeasurement of deferred tax liabilities following U.S. tax-law changes. The effective tax rate was 22.6% this quarter versus negative 93.8% in the prior-year quarter. Prior-year results also included restructuring charges and impairment associated with divestitures; the filing does not provide a directly comparable adjusted earnings figure.
Segment performance and material changes
- Beef: Sales rose to $3,926 from $3,886; operating income increased to $305 from $256. Management cited strong export demand and more favorable domestic conditions, partly offset by higher operating and labor costs.
- Pork: Sales fell to $1,179 from $1,283; operating income declined to $95 from $151. Excess domestic supply and compressed margins, along with higher operating and labor costs, weighed on results.
- Chicken: Sales increased to $3,115 from $2,997, mainly reflecting acquired volumes; operating income fell to $160 from $272. Management cited lower average selling prices, product mix, higher feed and labor costs, and challenging market conditions. Segment income included $8 million of Keystone purchase-accounting adjustments.
- Prepared Foods: Sales declined to $2,149 from $2,292, primarily due to divestitures; operating income improved to $265 from $256, supported by demand and product mix.
- Other: Operating loss widened to $18 from $13, including Keystone purchase-accounting and acquisition costs.
Sales volume increased 3.3%, while average selling prices decreased 3.7%, leaving total sales down 0.4%. Acquisitions added volume, while fiscal 2018 divestitures reduced Prepared Foods volume. Management reported increased operating and labor costs across segments and said trade-policy uncertainty and tariffs were affecting domestic and export prices, particularly for chicken and pork. Domestic protein production increased approximately 2% year over year, according to USDA figures cited in the filing.
Cash flow, debt, and liquidity
- Operating cash flow was $868, down from $1,126; the prior-year amount included substantial deferred-tax accounting effects. Capital expenditures were $318, versus $296.
- Investing cash outflow was $2,449, including $2,141 of acquisitions, principally Keystone. Financing cash inflow was $1,711, including $1,807 of term-loan proceeds.
- Cash ended at $400, compared with $270 at fiscal year-end. Total debt was $11,992, up from $9,873; current debt was $3,917 and long-term debt $8,075. The debt increase primarily reflects acquisition financing.
- Net debt to EBITDA was 3.0x, up from 2.4x at September 29, 2018. The company reported compliance with debt covenants.
- Reported liquidity was $1,414, including cash, short-term investments, and revolving-credit availability net of commercial paper. Commercial paper outstanding was $737; the $1.75 billion revolving facility had no borrowings. The current ratio declined to 0.85 from 1.13, primarily because of higher current debt.
Outlook, commentary, and risks
Management expected fiscal 2019 capital spending of approximately $1.4 billion to $1.5 billion and net interest expense of approximately $450 million. It intended to repay current debt using operating cash flow and other liquidity sources, including senior-note issuance as permanent financing for Keystone. The filing does not provide a clear full-year earnings or revenue forecast.
On February 6, 2019, Tyson announced a definitive agreement to acquire BRF S.A.’s Thai and European operations for $340 million in cash, subject to adjustments and customary closing conditions. Closing was expected before the end of fiscal Q3 2019; completion was not assured. The company also reported ongoing integration of Keystone and related internal-control integration work.
Key risks include commodity and feed-cost volatility, labor availability and cost, export access and tariffs, livestock disease, food safety, acquisition integration and leverage, customer concentration, and litigation. Material proceedings described include broiler-chicken and pork antitrust class actions, a poultry-grower antitrust matter, and an appealed asbestos judgment. The filing says no material changes were made to the risk factors in the prior annual report.
Unusual items included $26 million pretax of Keystone purchase-accounting and acquisition-related costs and $8 million of restructuring charges. The company’s multi-year Financial Fitness Program had recognized $217 million of an estimated $253 million in cumulative pretax charges by quarter-end. Management identified expected lease-accounting adoption impacts as potentially material but said it could not yet reasonably estimate the balance-sheet or financial-statement effects.
Important facts for investors to verify
- How Keystone integration, purchase accounting, and expected acquisition benefits affect future Chicken results, debt, and cash generation.
- Whether weaker Pork and Chicken margins recover amid supply, pricing, feed-cost, trade-policy, and tariff pressures.
- Ability to refinance or repay the $3.9 billion of current debt, and the implications of 3.0x net debt to EBITDA and planned senior-note issuance.
- Whether fiscal 2019 capital spending and net-interest expectations remain achievable, and the status and financing of the proposed BRF transaction.
- Developments, potential exposure, and accrual adequacy for the disclosed antitrust, labor, environmental, and other legal matters.