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| TSN > SEC Filings for TSN > Form 10-Q on 2-Feb-2009 | All Recent SEC Filings |
2-Feb-2009
Quarterly Report
RESULTS OF OPERATIONS
Description of the Company
We are the world's largest meat company and the second-largest food production company in the Fortune 500 with one of the most recognized brand names in the food industry. We produce, distribute and market chicken, beef, pork, prepared foods and related allied products. Our operations are conducted in four segments: Chicken, Beef, Pork and Prepared Foods. Some of the key factors that influence our business are customer demand for our products; ability to maintain and grow relationships with customers and introduce new and innovative products to the marketplace; accessibility of international markets; market prices for our chicken; beef and pork products; cost of live cattle and hogs, raw materials and grain and operating efficiencies of our facilities.
Overview
? Chicken Segment - Operating loss incurred due largely to increased grain
costs of $183 million, as compared to the same period last year. In
addition, we had losses of $168 million from our commodity risk management
activities related to grain purchases, as compared to gains of $29 million
in the first quarter fiscal 2008.
? Beef Segment - Operating margins were breakeven during the quarter, but
improved over the first quarter of last year, despite a significant
reduction in slaughter volumes.
? Pork Segment - We achieved operating margins of $55 million, or 6.3%, even
though sales volume was down as compared to the same period last year.
? Prepared Foods Segment - Operating margins were $35 million, or 4.7%,
driven by an increase in sales volume.
? Acquisitions - In October 2008, we completed the acquisition of three
vertically integrated poultry companies in southern Brazil.
in millions, except per share data Three Months Ended
December 27, 2008 December 29, 2007
Net income (loss) $ (112 ) $ 34
Net income (loss) per diluted share (0.30 ) 0.10
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First quarter of fiscal 2009 - Net income (loss) included the following item:
? $20 million non-cash inventory adjustment for a lower-of-cost-or-market
valuation allowance. We expect this allowance will be realized in the
second quarter of fiscal 2009.
First quarter of fiscal 2008 - Net income (loss) included the following items:
? $18 million non-operating gain related to the sale of an investment.
? $6 million of severance charges related to the FAST initiative.
? Chicken - In December 2008 after seeing a noticeable decline in our
demand, we initiated a production cut of approximately 5%. We have seen an
improvement in pricing, while our inputs costs have decreased. With the
operational efficiencies we are making and as industry fundamentals are
improving, we hope to return our Chicken segment to profitability later in
fiscal 2009. By the end of the second quarter fiscal 2009, we should be
through the majority of our long grain positions, with the exception of
those related to our cost-plus customers.
? Beef - While we may experience a reduction in our revenues due partially
to reduced drop credits, we expect to generate our margins through the
lower live cattle costs and managing other costs. We expect an adequate
supply of fed cattle. We are optimistic about our international demand's
recovery, while domestic demand will largely depend on the overall
economy.
? Pork - We expect fewer hogs will be available in fiscal 2009 as compared
to fiscal 2008, but should still have adequate supplies to maintain strong
margins throughout the year.
? Prepared Foods - We expect the increased demand for our products will
carry forward from our first quarter; however, we expect raw material
costs will increase throughout the year, which we expect to recover
through pricing.
Summary of Results - Continuing Operations
Sales
in millions Three Months Ended
December 27, 2008 December 29, 2007
Sales $ 6,521 $ 6,476
Change in average sales price 3.5 %
Change in sales volume (2.7 )%
Sales growth 0.7 %
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? The sales growth was largely due to improved average sales prices, which
accounted for an increase of approximately $286 million. While all
segments had an increase in average sales prices, the majority of the
increase was in the Beef and Pork segments.
? Sales were negatively impacted by a decrease in sales volume, which
accounted for a decrease of approximately $241 million. The decrease
resulted from reduced Beef and Pork sales volume. This was partially
offset by an increase in Chicken sales volume, primarily driven by an
increase from our foreign operations.
Cost of Sales
in millions Three Months Ended
December 27, 2008 December 29, 2007
Cost of sales $ 6,503 $ 6,161
Gross margin $ 18 $ 315
Cost of sales as a percentage of sales 99.7 % 95.1 %
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? Cost of sales increased $342 million. Cost per pound contributed to a $570
million increase, offset partially by a decrease in sales volume reducing
cost of sales $228 million.
? Increase due to net losses of $168 million in the first quarter of
fiscal 2009, as compared to net gains of $29 million in the first
quarter of fiscal 2008, from our commodity risk management activities
related to grain purchases, which exclude the impact from related
physical purchase transactions that will impact future period operating
results.
? Increase in grain costs of $183 million.
? Increase in average live hog costs of approximately $55 million.
? Increase of Prepared Foods raw material costs of approximately $34
million.
? Decrease in sales volume largely due to reduced volume in the Beef and
Pork segments. This was partially offset by an increase in Chicken
sales volume, primarily driven by an increase from our foreign
operations.
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Selling, General and Administrative
in millions Three Months Ended
December 27, 2008 December 29, 2007
Selling, general and administrative
expenses $ 216 $ 215
As a percentage of sales 3.3 % 3.3 %
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? Increase of $12 million related to negative investment returns on
company-owned life insurance.
? Decrease of $10 million related to advertising and sales promotions.
Other Charges
in millions Three Months Ended December 27, 2008 December 29, 2007 $ - $ 6
? First quarter of fiscal 2008 - Included $6 million of severance charges related to the FAST initiative.
Interest Expense
in millions Three Months Ended
December 27, 2008 December 29, 2007
Interest expense $ 63 $ 53
Average borrowing rate 7.0 % 7.3 %
Change in average weekly debt 14.2 %
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? First quarter of fiscal 2009 - Included $5 million of expense related to our interest rate swap and financing costs associated with our December 17, 2008, credit agreement amendments.
Other Expense (Income), net
in millions Three Months Ended
December 27, 2008 December 29, 2007
Other expense (income), net $ 18 $ (19 )
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? First quarter of fiscal 2009 - Included $19 million in foreign currency
exchange loss.
? First quarter of fiscal 2008 - Included $18 million non-operating gain
related to the sale of an investment.
Effective Tax Rate
Three Months Ended
December 27, 2008 December 29, 2007
Effective tax rate 56.4 % 33.9 %
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? First quarter of fiscal 2009 effective tax rate was impacted by -
? the Domestic Production Deduction;
? general business credits;
? amounts relating to company-owned life insurance and certain other
nondeductible expense items; and
? state and foreign valuation allowances.
? First quarter of fiscal 2008 effective tax rate was impacted by -
? general business credits;
? certain nontaxable income items;
? certain nondeductible expense items; and
? the composition of income and loss between domestic and foreign
operations.
We operate in four segments: Chicken, Beef, Pork and Prepared Foods. The following table is a summary of sales and segment profit (loss), which we measure at the operating income (loss) level. Segment results exclude the results of our discontinued operation, Lakeside.
in millions Sales Operating Income (Loss)
Three Months Ended Three Months Ended
December 29,
December 27, 2008 December 29, 2007 December 27, 2008 2007
Chicken $ 2,234 $ 2,102 $ (286 ) $ 48
Beef 2,663 2,861 - (68 )
Pork 878 836 55 79
Prepared Foods 746 677 35 35
Other - - (2 ) -
Total $ 6,521 $ 6,476 $ (198 ) $ 94
Chicken Segment Results
in millions Three Months Ended
December 27, 2008 December 29, 2007 Change
Sales $ 2,234 $ 2,102 $ 132
Sales Volume Change 4.7 %
Average Sales Price Change 1.5 %
Operating Income (Loss) $ (286 ) $ 48 $ (334 )
Operating Margin (12.8 )% 2.3 %
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? Sales and Operating Income (Loss) - Sales and operating results were impacted positively by higher average sales prices and increased sales volume, primarily due to our foreign operations. Operating results were adversely impacted by an increase in grain costs of $183 million, as compared to the same period of fiscal 2008. We also had net losses of $168 million from our commodity risk management activities related to grain purchases, as compared to net gains of $29 million for the first quarter fiscal 2008. Operating results were also adversely impacted by an increase in net losses of $18 million from our commodity risk management activities related to energy purchases, as compared to the same period of fiscal 2008. These net losses exclude the impact from related physical purchase transactions, which will impact future period operating results. Operating results also included a non-cash inventory adjustment for a lower-of-cost-or-market valuation allowance of $20 million.
Beef Segment Results
in millions Three Months Ended
December 27, 2008 December 29, 2007 Change
Sales $ 2,663 $ 2,861 $ (198 )
Sales Volume Change (10.8 )%
Average Sales Price Change 4.4 %
Operating Income (Loss) $ - $ (68 ) $ 68
Operating Margin 0.0 % (2.4 )%
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? Sales and Operating Income (Loss) - Operating results were positively impacted by increased average sales prices and lower average live prices, partially offset by a decrease in sales volume. Operating results were positively impacted by net gains of $41 million from our commodity risk management activities related to forward futures contracts for live cattle as compared to the same period of fiscal 2008. This amount excludes the impact from related physical purchase and sale transactions, which will impact future period operating results.
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Pork Segment Results
in millions Three Months Ended
December 27, 2008 December 29, 2007 Change
Sales $ 878 $ 836 $ 42
Sales Volume Change (4.9 )%
Average Sales Price Change 10.3 %
Operating Income $ 55 $ 79 $ (24 )
Operating Margin 6.3 % 9.4 %
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? Sales and Operating Income - Operating results were impacted positively by increased average sales prices, offset by higher average live prices and decreased sales volume. Operating results were negatively impacted by a decrease in net gains of $20 million from our commodity risk management activities related to forward futures contracts for live hogs as compared to the same period of fiscal 2008. This amount excludes the impact from related physical purchase and sale transactions, which will impact future period operating results.
Prepared Foods Segment Results
in millions Three Months Ended
December 27, 2008 December 29, 2007 Change
Sales $ 746 $ 677 $ 69
Sales Volume Change 3.7 %
Average Sales Price Change 6.3 %
Operating Income $ 35 $ 35 $ -
Operating Margin 4.7 % 5.2 %
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? Sales and Operating Income - Operating results were positively impacted by higher average sales prices and increased sales volumes, offset by higher raw material costs.
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