Tyson Foods, Inc. — Q1 FY2018 Form 10-Q
Reporting period: Three months ended December 30, 2017; comparisons are with the three months ended December 31, 2016. Amounts are in U.S. dollars. Tyson operates Beef, Pork, Chicken and Prepared Foods segments.
Financial results and key metrics
| Metric | Q1 FY2018 | Prior-year quarter |
|---|---|---|
| Sales | $10.229 billion | $9.182 billion |
| Gross profit / margin | $1.451 billion / 14.2% | $1.483 billion / 16.2% |
| Operating income / margin | $927 million / 9.1% | $982 million / 10.7% |
| Income before taxes | $842 million | $912 million |
| Net income attributable to Tyson | $1.631 billion | $593 million |
| Diluted earnings per share | $4.40 | $1.59 |
| Cash provided by operations | $1.126 billion | $1.134 billion |
| Capital expenditures | $296 million | $200 million |
Sales increased 11.4%, reflecting 5.2% higher volume and 5.9% higher average prices; the filing attributes $396 million of the increase to post-acquisition AdvancePierre sales. Despite revenue growth, cost of sales rose faster, by $1.080 billion, and operating income declined 5.6%. Net income and EPS were unusually elevated by a $994 million tax benefit from remeasuring deferred tax liabilities after U.S. tax reform; they do not reflect comparable growth in operating performance.
Segment operating income: Beef $256 million (down from $299 million; margin 6.6%); Pork $151 million (down from $247 million; margin 11.8%); Chicken $272 million (up from $263 million; margin 9.1%); Prepared Foods $261 million (up from $190 million; margin 11.4%).
Balance sheet and liquidity: At December 30, 2017, cash was $293 million, current assets $5.993 billion and current liabilities $3.978 billion; the current ratio was 1.51. Total debt was $9.686 billion ($811 million current; $8.875 billion long-term), compared with $10.203 billion at September 30, 2017. Net debt was $9.391 billion, and net debt/EBITDA was 2.6x (2.7x at fiscal year-end). Reported liquidity was $1.101 billion, including $1.488 billion available on the revolving facility, offset by $682 million of commercial paper. Tyson reported compliance with debt covenants.
Material changes and unusual items
- The Tax Cuts and Jobs Act produced a provisional $994 million deferred-tax benefit. The effective tax rate was negative 93.8%, versus 34.9% a year earlier. Tyson said its accounting was incomplete and estimated fiscal 2018 and 2019 effective tax rates of approximately negative 4% and 25%, respectively.
- Interest expense increased to $88 million from $58 million, mainly because of debt issued for the AdvancePierre acquisition. Tyson acquired a value-added protein business for $226 million during the quarter.
- Tyson completed the sale of its Kettle business for $125 million net proceeds, recording a $22 million pretax gain and using proceeds to reduce debt. A $26 million pretax impairment on other businesses held for sale resulted in a net $4 million pretax disposal-related charge. Remaining held-for-sale businesses had a net carrying value of approximately $704 million.
- The Financial Fitness Program generated $37 million of savings in the quarter and incurred $19 million of restructuring charges. Estimated cumulative pretax program charges are $218 million; $169 million had been recognized to date.
- Class A and Class B dividends declared per share rose to $0.375 and $0.338, respectively, from $0.300 and $0.270. Tyson repurchased $164 million of Class A shares, versus $576 million in the prior-year quarter.
Management outlook, risks and contingencies
- Management expects cumulative net Financial Fitness Program savings of $200 million in FY2018, $400 million in FY2019 and $600 million in FY2020; savings depend on successful execution and integration. The program includes eliminating approximately 600 positions.
- Tyson expects FY2018 capital spending of $1.4–$1.5 billion, including $100 million of incremental tax-reform investment, and net interest expense of approximately $335 million. It expected more than $300 million of incremental tax-reform cash flow in FY2018, including over $100 million in one-time frontline employee bonuses in Q2.
- Management anticipated closing sales of the Sara Lee Frozen Bakery, Van’s and an additional non-protein business in the second half of FY2018. It said it did not plan further share repurchases beyond equity-compensation dilution offset until net debt/EBITDA was around 2x, then anticipated in Q3 FY2018.
- Key operating exposures include livestock and feed costs, commodity-price volatility, labor and freight costs, demand and product mix, foreign-market access, disease outbreaks, food safety, and integration of AdvancePierre. Higher cattle and hog costs pressured Beef and Pork; Pork operating income fell sharply. Prepared Foods faced approximately $45 million of higher input costs.
- Material legal matters include broiler-chicken price-fixing and grower-compensation antitrust litigation, a Philippines labor award under appeal with an uncertain ultimate enforceable loss, and an appealed approximately $13 million asbestos verdict. The filing states that an adverse outcome or inadequate accrual in certain matters could materially affect results or financial condition. Other noted matters include a proposed environmental plea agreement requiring a $2 million fine and $500,000 community payment, subject to court approval.
- Management said disclosure controls were effective as of December 30, 2017; integration of AdvancePierre’s internal controls was ongoing. The filing reported no material change in risk factors from the FY2017 Form 10-K.
Important facts for investors to verify
- How the provisional tax-reform accounting changes during the measurement period, and whether the projected tax rates and cash benefits are realized.
- Whether revenue growth and segment profitability persist without acquisition contributions, particularly given weaker Pork and Beef operating results.
- Actual delivery, timing and costs of Financial Fitness Program savings, including remaining restructuring charges and workforce reductions.
- Progress and final proceeds from the remaining non-protein business sales, including any further impairments or gains.
- Debt reduction, refinancing needs, interest costs and the timing of any return to share repurchases at the stated leverage threshold.
- Developments in poultry antitrust cases, the Philippines labor matter and other significant contingencies, including whether recorded accruals remain adequate.