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TSN > SEC Filings for TSN > Form 10-Q on 7-Aug-2014All Recent SEC Filings

Show all filings for TYSON FOODS INC

Form 10-Q for TYSON FOODS INC


7-Aug-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

RESULTS OF OPERATIONS
Description of the Company
We are one of the world's largest meat protein companies 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. Some of the key factors influencing our business are customer demand for our products; the 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 products; the cost and availability of live cattle and hogs, raw materials, feed ingredients; and operating efficiencies of our facilities. Our operations are conducted in five segments: Chicken, Beef, Pork, Prepared Foods and International. During the second quarter of fiscal 2014, we began reporting our International operation as a separate segment, which was previously included in our Chicken segment. Our International segment became a separate reportable segment as a result of changes to our internal financial reporting to align with previously announced executive leadership changes. The International segment includes our foreign operations primarily related to raising and processing live chickens into fresh, frozen and value-added chicken products in Brazil, China, India and Mexico. All periods presented have been reclassified to reflect this change. Beef, Pork, Prepared Foods and Other results were not impacted by this change.
Overview
General - Our operating results remained strong in the third quarter of fiscal 2014 led by solid earnings in our Pork segment and continued strength in our Chicken and Beef segments, partially offset with negative returns in our Prepared Foods and International segments.

            We continued to execute our strategy of accelerating growth in
             domestic value-added chicken sales and prepared food sales,
             innovating products, services and customer insights and cultivating
             our talent development to support Tyson's growth for the future.


            We also maintained focus on maximizing our margins through margin
             management and operational efficiency improvements. Margin
             management improvements occurred in the areas of mix, export sales,
             price optimization and value-added product initiatives. The
             operational efficiencies occurred in areas of yields, cost reduction
             and labor management.


            Market environment - Our Chicken segment delivered solid results in
             the third quarter of fiscal 2014 driven by favorable domestic market
             conditions associated with strong demand for our chicken products.
             Our Beef segment experienced higher fed cattle costs and reduced
             availability of fed cattle supplies but delivered strong results by
             maximizing our revenues relative to the rising live cattle markets.
             Our Pork segment results remained strong in the third quarter of
             fiscal 2014 due to favorable market conditions associated with lower
             total pork supplies. Our Prepared Foods segment was challenged by
             rapidly increasing raw material prices in addition to costs incurred
             as we continue to invest in our growth platforms. Our International
             segment experienced losses due to challenging market conditions in
             China and Brazil.


      Margins - Our total operating margin was 3.6% in the third quarter of
       fiscal 2014. Operating margins by segment were as follows (Prepared Food
       segment recorded a $49 million impairment due to the planned closure of

three facilities):

Chicken - 6.9%

Beef - 2.4%

Pork - 7.2%

Prepared Foods - (5.5)%

International - (4.1)%

Debt and Liquidity - During the third quarter of fiscal 2014 we generated $278 million of operating cash flows. At June 28, 2014, we had approximately $1.5 billion of liquidity, which includes availability under our credit facility and $587 million of cash and cash equivalents.


Table of Contents

in millions, except per share data                     Three Months Ended               Nine Months Ended
                                                  June 28,                         June 28,
                                                    2014        June 29, 2013        2014        June 29, 2013
Net income from continuing operations
attributable to Tyson                            $     260     $        253       $     727     $        587
Net income from continuing operations
attributable to Tyson - per diluted share             0.73             0.69            2.05             1.61

Net loss from discontinued operation
attributable to Tyson                                    -               (4 )             -              (70 )
Net loss from discontinued operation
attributable to Tyson - per diluted share                -            (0.01 )             -            (0.19 )

Net income attributable to Tyson                       260              249             727              517
Net income attributable to Tyson - per diluted
share                                                 0.73             0.68            2.05             1.42

Third quarter and nine months - Fiscal 2014 - Net income attributable to Tyson included the following items:
$40 million, or $0.11 per diluted share, related to a gain on an unrecognized tax benefit;

$49 million, or $0.08 per diluted share, impairment related to the planned closure of three Prepared Foods plants; and

$29 million, or $0.05 per diluted share, related to Hillshire Brands ("Hillshire") acquisition fees paid to third parties.

Nine months - Fiscal 2013 - Net income attributable to Tyson included the following item:
$19 million, or $0.05 per diluted share, related to a recognized currency translation adjustment.

Summary of Results
Sales
in millions                                   Three Months Ended                     Nine Months Ended
                                      June 28, 2014       June 29, 2013      June 28, 2014      June 29, 2013
Sales                                $       9,682      $         8,731     $      27,475     $        25,480
Change in sales volume                         2.2 %                                  2.5 %
Change in average sales price                  8.5 %                                  5.4 %
Sales growth                                  10.9 %                                  7.8 %

Third quarter - Fiscal 2014 vs Fiscal 2013
Sales Volume - Sales were positively impacted by higher sales volume, which accounted for an increase of $141 million. All segments, with the exception of the Beef segment, had an increase in sales volume.

Average Sales Price - Sales were positively impacted by higher average sales prices, which accounted for an increase of $810 million. The Beef, Pork and Prepared Foods segments had an increase in average sales price largely due to improved mix and increased pricing associated with rising raw material, cattle and hog costs. These increases were partially offset by a decrease in average sales price in the Chicken and International segments which was driven by lower domestic feed ingredient costs and volatile markets in our International segment.

Nine months - Fiscal 2014 vs Fiscal 2013
Sales Volume - Sales were positively impacted by higher sales volume, which accounted for an increase of $503 million. All segments had an increase in sales volume.

Average Sales Price - Sales were positively impacted by higher average sales prices, which accounted for an increase of approximately $1.5 billion. The Beef, Pork and Prepared Foods segments had an increase in average sales price largely due to continued tight domestic availability of protein, increased pricing associated with rising live and raw material costs, and improved mix. These increases were partially offset by a decrease in average sales price in the Chicken and International segments driven by lower domestic feed ingredient costs and volatile markets in our International segment.


Table of Contents

Cost of Sales
in millions                                   Three Months Ended                   Nine Months Ended
                                        June 28, 2014     June 29, 2013     June 28, 2014     June 29, 2013
Cost of sales                          $      9,045      $       8,049     $      25,502     $      23,791
Gross profit                           $        637      $         682     $       1,973     $       1,689
Cost of sales as a percentage of sales         93.4 %             92.2 %            92.8 %            93.4 %

Third quarter - Fiscal 2014 vs Fiscal 2013
Cost of sales increased $996 million. Higher input cost per pound increased cost of sales $876 million and higher sales volume increased cost of sales $120 million.

         The $876 million impact of higher input cost per pound was primarily
          driven by:


            Increases in live cattle and live hog costs of approximately $490
             million and $265 million, respectively.


            Increase in raw material and other input costs in our Prepared Foods
             segment of approximately $95 million.


            Increase of $49 million from an impairment related to the planned
             closure of three Prepared Foods plants.


            Decreases in feed costs of approximately $120 million in our Chicken
             segment and $14 million in our International segment.


         The $120 million impact of higher sales volume was driven by increases
          in sales volume in all of our segments other than our Beef segment.

Nine months - Fiscal 2014 vs Fiscal 2013
Cost of sales increased $1.7 billion. Higher input cost per pound increased cost of sales approximately $1.2 billion and higher sales volume increased cost of sales $478 million.

         The $1.2 billion impact of higher input cost per pound was primarily
          driven by:


            Increases in live cattle and live hog costs of approximately $940
             million and $405 million, respectively.


            Increase in raw material and other input costs in our Prepared Foods
             segment of approximately $160 million.


            Increase of $49 million from an impairment related to the planned
             closure of three Prepared Foods plants.


            Decreases in feed costs of approximately $460 million in our Chicken
             segment and $32 million in our International segment.


         The $478 million impact of higher sales volume was driven by increases
          in sales volume in all of our segments.


Selling, General and Administrative
in millions                                  Three Months Ended                     Nine Months Ended
                                      June 28, 2014      June 29, 2013      June 28, 2014      June 29, 2013
Selling, general and administrative
expense                              $        286       $          263     $        849       $          730
As a percentage of sales                      3.0 %                3.0 %            3.1 %                2.9 %

Third quarter - Fiscal 2014 vs Fiscal 2013
Increase of $8 million related to advertising, sales promotions and commissions.

Increase of $9 million related to professional fees and charitable contributions

Increase of $7 million from Hillshire acquisition fees paid to third parties.

Nine months - Fiscal 2014 vs Fiscal 2013
Increase of $31 million related to employee costs including payroll and stock-based and incentive-based compensation.

Increase of $43 million related to advertising, sales promotions and commissions.

Increase of $29 million related to professional fees and charitable contributions

Increase of $7 million from Hillshire acquisition fees paid to third parties.


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Interest Expense
in millions                                  Three Months Ended                   Nine Months Ended
                                     June 28, 2014      June 29, 2013     June 28, 2014      June 29, 2013
Cash interest expense                $         24     $            29     $         73     $            88
Non-cash interest expense                       1                   7                5                  21
Total Interest Expense               $         25     $            36     $         78     $           109

Third quarter and nine months - Fiscal 2014 vs Fiscal 2013
Cash interest expense includes interest expense related to the coupon rates for senior notes and commitment/letter of credit fees incurred on our revolving credit facilities. The decrease is due to a lower average debt balance compared to the same period in fiscal 2013 as our 2013 Notes were paid off and retired on October 15, 2013.

Non-cash interest expense primarily includes interest related to the amortization of debt issuance costs and discounts/premiums on note issuances. The decrease is due to lower amortization of debt issuance costs and discounts compared to the same period in fiscal 2013 as our 2013 Notes were paid off and retired on October 15, 2013.

Other (Income) Expense, net
in millions                                  Three Months Ended                    Nine Months Ended
                                     June 28, 2014      June 29, 2013      June 28, 2014     June 29, 2013
                                     $         17     $              -     $         18     $        (19 )

Nine months - Fiscal 2014
Includes an expense of $6 million related to the impairment of an equity security investment and $22 million of costs associated with bridge financing facilities for the Hillshire acquisition, which were partially offset by income of $11 million of equity earnings in joint ventures and foreign currency exchange gains.

Nine months - Fiscal 2013
Included $19 million related to a currency translation adjustment gain recognized in conjunction with the receipt of proceeds constituting the final resolution of our investment in Canada.

Effective Tax Rate
         Three Months Ended                 Nine Months Ended
  June 28, 2014     June 29, 2013    June 28, 2014     June 29, 2013
         16.8 %             35.4 %          30.4 %             32.6 %

Third quarter and nine months - Fiscal 2014 - The effective tax rate for continuing operations was impacted by:
state income taxes;

the domestic production deduction;

losses in foreign jurisdictions for which no benefit is recognized; and

decrease in tax reserves due to the expiration of federal and state statutes of limitations and settlements with taxing authorities.

Third quarter and nine months - Fiscal 2013 - The effective tax rate for continuing operations was impacted by:
state income taxes;

the domestic production deduction; and

losses in foreign jurisdictions for which no benefit is recognized.


Table of Contents

Segment Results
We operate in five segments: Chicken, Beef, Pork, Prepared Foods and
International. The following table is a summary of sales and operating income
(loss), which is how we measure segment income.
in millions                                        Sales
                          Three Months Ended                   Nine Months Ended
                    June 28, 2014     June 29, 2013     June 28, 2014     June 29, 2013
Chicken            $      2,829      $       2,820     $       8,327     $       8,148
Beef                      4,189              3,723            11,748            10,655
Pork                      1,766              1,332             4,677             4,006
Prepared Foods              901                797             2,669             2,441
International               365                343             1,020             1,001
Other                         -                  -                 -                47
Intersegment Sales         (368 )             (284 )            (966 )            (818 )
Total              $      9,682      $       8,731     $      27,475     $      25,480


in millions                            Operating Income (Loss)
                       Three Months Ended                    Nine Months Ended
                June 28, 2014      June 29, 2013      June 28, 2014     June 29, 2013
Chicken        $        195       $          215     $        682      $           471
Beef                    101                  114              194                  134
Pork                    128                   67              356                  264
Prepared Foods          (50 )                 24              (13 )                 85
International           (15 )                  5              (73 )                  -
Other                    (8 )                 (6 )            (22 )                  5
Total          $        351       $          419     $      1,124      $           959

Third quarter and nine months - Fiscal 2014
Operating income was reduced by $49 million in the Prepared Foods segment for impairments related to the closure of three plants.

Operating income was reduced by $7 million in Other for third party transaction fees incurred as part of the Hillshire

acquisition.
Chicken Segment Results

in millions                       Three Months Ended                               Nine Months Ended
                     June 28, 2014     June 29, 2013      Change      June 28, 2014     June 29, 2013      Change
Sales               $       2,829     $       2,820     $     9      $       8,327     $       8,148     $   179
Sales Volume Change                                         1.3  %                                           2.7  %
Average Sales Price
Change                                                     (1.0 )%                                          (0.5 )%
Operating Income    $         195     $         215     $   (20 )    $         682     $         471     $   211
Operating Margin              6.9 %             7.6 %                          8.2 %             5.8 %

Third quarter and nine months - Fiscal 2014 vs Fiscal 2013
Sales Volume - Sales volume grew as a result of stronger demand for chicken products and mix of rendered product sales.

Average Sales Price - Average sales price decreased as feed ingredient costs declined, partially offset by mix changes.

Operating Income - Operating income for the third quarter of fiscal 2014 was negatively impacted by rapidly rising costs of outside meat purchases as well as operational disruptions at two of our facilities. For the nine months of fiscal 2014, operating income increased due to higher sales volume and lower feed ingredient costs, partially offset by decreased average sales price. Feed costs decreased $120 million and $460 million for the third quarter and nine months of fiscal 2014, respectively.


Table of Contents

Beef Segment Results
in millions                       Three Months Ended                               Nine Months Ended
                     June 28, 2014     June 29, 2013      Change      June 28, 2014     June 29, 2013     Change
Sales               $       4,189     $       3,723     $   466      $      11,748     $      10,655     $ 1,093
Sales Volume Change                                        (0.9 )%                                           0.4 %
Average Sales Price
Change                                                     13.5  %                                           9.8 %
Operating Income    $         101     $         114     $   (13 )    $         194     $         134     $    60

Operating Margin 2.4 % 3.1 % 1.7 % 1.3 %

Third quarter and nine months - Fiscal 2014 vs Fiscal 2013
Sales Volume - Sales volume decreased for the third quarter of fiscal 2014 due to a reduction in live cattle processed. However, sales volumes were up for the nine months of fiscal 2014 due to better domestic demand for our beef products, partially offset by reduced exports.

Average Sales Price - Average sales price increased due to lower domestic availability of fed cattle supplies, which additionally drove up livestock costs.

Operating Income - Operating income decreased for the third quarter of fiscal 2014 due to higher fed cattle costs and periods of reduced demand for beef products, which made it difficult to pass along increased input costs, as well as lower sales volumes and increased operating costs. For the nine months of fiscal 2014, operating income increased due to improved operational execution and maximizing our revenues relative to the rising live cattle markets, partially offset by increased operating costs.

Pork Segment Results
in millions                       Three Months Ended                               Nine Months Ended
                     June 28, 2014     June 29, 2013      Change      June 28, 2014     June 29, 2013      Change
Sales               $       1,766     $       1,332     $    434     $       4,677     $       4,006     $    671
Sales Volume Change                                          5.0 %                                            1.1 %
Average Sales Price
Change                                                      26.3 %                                           15.4 %
Operating Income    $         128     $          67     $     61     $         356     $         264     $     92

Operating Margin 7.2 % 5.0 % 7.6 % 6.6 %

Third quarter and nine months - Fiscal 2014 vs Fiscal 2013
Sales Volume - Sales volume increased as a result of better domestic demand for our pork products.

Average Sales Price - Average sales price increased due to lower total hog supplies, which additionally resulted in higher input costs.

Operating Income - Operating income increased as we maximized our revenues relative to live hog markets, partially attributable to operational and mix performance.


Table of Contents

Prepared Foods Segment Results

in millions                         Three Months Ended                                 Nine Months Ended
                      June 28, 2014       June 29, 2013       Change      June 28, 2014     June 29, 2013      Change
Sales               $        901         $        797       $    104     $      2,669      $       2,441     $    228
Sales Volume Change                                              4.0 %                                            5.2 %
Average Sales Price
Change                                                           8.7 %                                            4.0 %
Operating Income    $        (50 )       $         24       $    (74 )   $        (13 )    $          85     $    (98 )

Operating Margin (5.5 )% 3.0 % (0.5 )% 3.5 %

Third quarter and nine months - Fiscal 2014 vs Fiscal 2013
Sales Volume - Sales volume increased as a result of improved demand for our prepared foods products and incremental volumes from the purchase of three businesses.

Average Sales Price - Average sales price increased due to better product mix and price increases associated with higher input costs.

Operating Income - Operating income decreased as a result of higher raw material and other input costs of approximately $95 million and $160 million for the third quarter and nine months of fiscal 2014, respectively, and additional costs incurred as we invested in our growth platforms. Because many of our sales contracts are formula based or shorter-term in nature, we are typically able to offset rising input costs through pricing. However, there is a lag time for price increases to take effect. Additionally, in the third quarter of fiscal 2014, we incurred a $49 million impairment charge related to the planned closure of three plants, which are expected to cease operation by mid-fiscal 2015.

International Segment Results

in millions                         Three Months Ended                                  Nine Months Ended
                      June 28, 2014       June 29, 2013       Change      June 28, 2014     June 29, 2013      Change
Sales               $        365         $        343       $    22      $      1,020      $       1,001     $     19
Sales Volume Change                                            17.2  %                                           14.0  %
Average Sales Price
Change                                                         (9.2 )%                                          (10.6 )%
Operating Income    $        (15 )       $          5       $   (20 )    $        (73 )    $           -     $    (73 )
Operating Margin            (4.1 )%               1.5 %                          (7.2 )%               - %

Third quarter and nine months - Fiscal 2014 vs Fiscal 2013
Sales Volume - Sales volume increased as we grew our businesses in Brazil and China.

Average Sales Price - Average sales price decreased due to poor export market conditions in Brazil, supply imbalances associated with weak demand in China and a less favorable pricing environment in Mexico.

Operating Income - Operating income decreased due to poor operational execution in Brazil, challenging market conditions in Brazil and China and additional costs incurred as we grew our International operation.


Table of Contents

LIQUIDITY AND CAPITAL RESOURCES
Our cash needs for working capital, capital expenditures, growth opportunities, the repurchases of senior notes and share repurchases are expected to be met with current cash on hand, cash flows provided by operating activities, or short-term borrowings. Based on our current expectations, we believe our liquidity and capital resources will be sufficient to operate our business. . . .

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