Feb 5 Fitch Ratings has affirmed the credit ratings of Tyson Foods, Inc.
(Tyson; NYSE: TSN) as follows:
--Long-term Issuer Default Rating (IDR) at 'BBB';
--Unsecured bank facility at 'BBB';
--Senior unsecured notes at 'BBB';
--Short-term IDR at 'F3'
The Rating Outlook is revised to Positive from Stable.
At the fiscal first quarter ended Dec. 29, 2012, Tyson had $2.4 billion of total
The Positive Outlook is due to Fitch's expectation of material additional debt
reduction and improvement in margins during fiscal 2014. Should Tyson pay off
its $458 million 3.25% convertible notes when they become due on Oct. 15, 2013,
as currently planned, maintains debt near the $2 billion level, and meets
Fitch's forecasts of operating earnings and cash flow improvement in 2014
ratings could be upgraded to 'BBB+'.
Fitch views management's total debt-to-EBITDA target of 1.3x or less as
achievable in most years and as acceptable for a commodity protein company with
a 'BBB+' rating. Although leverage could be slightly higher than targeted in
fiscal 2013, Fitch anticipates it falling to below 1.3x in fiscal 2014.
The reduction in leverage will be driven by the above mentioned debt reduction,
better margins in beef after further opening of the Japanese market, and the
potential for less cost pressure in chicken. Tyson expects about $600 million of
incremental feed costs for its chicken segment in 2013. The firm plans to
partially offset this cost with pricing and $100 million of operating
efficiencies which Fitch views as attainable.
Tyson's ratings reflect the firm's low financial leverage, improved operating
efficiency, prudent risk management, significant scale, and good
diversification. Tyson generated $33.3 billion of annualized sales during fiscal
2012 with 34% from chicken, 40% from beef, 16% from pork, and 10% from prepared
foods. With each protein subject to different production cycles and varying
supply/demand dynamics, weakness in one or more proteins can be offset by
strength in others.
Ratings incorporate the low margin and volatile nature of the commodity protein
industry. However, maintaining lower debt, engaging in fewer fix-priced customer
contracts, and being a more efficient operator are helping Tyson mitigate the
negative effects of unstable grain and livestock prices on its operating
Over the next three years, Tyson plans to accelerate growth in higher margin
value-added and prepared food products and faster growing emerging markets. The
company is targeting 6% - 8% sales growth for value-added products and 12% - 16%
growth for international in-country production on an annual basis. Increased
exposure to higher-margin value-added/prepared food products and faster growing
emerging markets would be viewed positively.
Tyson has generated good FCF (cash flow from operations less capital
expenditures and dividends) in 10 out of the 12 past years, despite periods of
volatility in its operating cash flow. Fitch believes the company's annual FCF
can equal or exceed the firm's 12-year average of approximately $300 million
over the long-term given improvement in its operations and lower annual interest
expense. Tyson expects net interest expense to approximate $140 million in
fiscal 2013, down from an average of about $300 million annually since 2009, due
to lower debt and the refinancing of higher coupon debt in fiscal 2012.
Sensitivity/Key Rating Drivers:
Conservative Financial Strategy
As previously mentioned, Tyson's financial strategy is to maintain total
debt-to-EBITDA in the 1.3x range or less as accomplished since 2010. The firm
targets liquidity, inclusive of cash and revolver availability, in the $1.2
billion - $1.5 billion range but has exceeded this level in recent years.
Tyson has increased share repurchases with timing dependent on working capital
needs, market conditions, liquidity, and debt obligations. Dividend requirements
are viewed as manageable.
Operational Efficiency and Prudent Risk Management
Tyson has been able to maintain favorable operating spreads to the industry by
benchmarking against peers and improving yields, mix, and other plant level
operations. The firm has achieved nearly $1 billion of operating efficiencies in
chicken since 2008, closed inefficient beef plants, and has processing plants
strategically located near its supplier base to ensure adequate supply while
reducing transportation costs. Fitch views Tyson's stated normalized operating
margins of 6-8% in pork, 5-7% in chicken, 4-6% in prepared foods, and 2.5-4.5%
in beef as achievable due to the above mentioned operating improvements.
Recent Operating Performance:
During the first quarter ended Dec. 29, 2012, consolidated sales grew 0.9% to
$8.4 billion due to 4.7% pricing being offset by a 3.3% decline in volumes.
Operating income increased 7.9% to $300 million due mainly to better
year-over-year performance in chicken and beef. Cash flow from operations
declined to $190 million from $338 million due to higher inventory-related
Segment level performance was mainly positive. The firm's operating margin in
chicken increased to 3.6% from 1.2% last year. Pricing in chicken increased 8.2%
on average and volumes declined a modest 1.1%. Tyson's operating margin in beef
improved to 1.3% from 0.9% last year with pricing increasing 11.7% but volumes
falling 10%. The pork segment's margin remained strong at 9.2% as increased
industry hog supply resulted in lower livestock cost. Lastly, Tyson's operating
margin in prepared foods declined to 3.9% from 5.9% due to lower pricing, as raw
material costs declined, and investments in the firm's lunchmeat operations.
During the latest 12 month (LTM) period ended Dec. 29, 2012, total
debt-to-operating EBITDA was approximately 1.4x and operating EBITDA-to-gross
interest expense was about 5.0x. LTM FCF was about $280 million. Fitch is
currently projecting total debt-to-operating EBITDA in the 1.5x range for fiscal
2013, due to modestly lower operating income and stable debt levels, and about
1.0x in fiscal 2014 due to lower debt levels and operating earnings and cash
Liquidity, Upcoming Maturities, and Significant Debt Terms:
Tyson's liquidity totaled approximately $1.9 billion at Dec. 29, 2012 and
consisted of $951 million of cash and an undrawn $1 billion unsecured revolver.
Significant upcoming maturities over the next three years are limited to $458
million 3.25% convertible notes due Oct. 15, 2013 which, as previously
mentioned, the firm intends to pay off with cash on hand.
Tyson's revolving facility expires Aug. 9, 2017. The facility is guaranteed by
Tyson and its Tyson Fresh Meats (TFM) subsidiary as long as TFM guarantees the
$638 million 2016 and $1 billion 2022 notes. The facility has a ratings-based
collateral trigger or springing lien should Tyson's corporate credit rating
falls below a 'BB+' or equivalent level. Tyson's $458 million convertible notes
due 2013, $120 million 7% notes due 2018, and $18 million 7% notes 2028 notes do
not benefit from a TFM guarantee. Fitch does not delineate ratings based on
these guarantees due to Tyson's solid investment grade profile and low
probability of default.
Financial maintenance covenants in Tyson credit facility include maximum
adjusted debt-to-capitalization ratio of .50 to 1.0 and minimum
EBITDA-to-interest expense of 3.75x. The agreement also has a maximum total debt
covenant of $3.64 billion prior to Oct. 31, 2013 and $3.5 billion after Oct. 31,
2013. Tyson has considerable room under these covenants as maximum
debt-to-capitalization was approximately 30% and total reported debt was $2.4
billion at Dec. 29, 2012.
What Could Trigger a Rating Action
Future developments that may, individually or collectively, lead to a positive
rating action within the 'BBB' category include:
--Total debt-to-operating EBITDA in line with the firm's goal of 1.3x or less
due to meaningful additional debt reduction and stable to improving operating
Future developments that may, individually or collectively, lead to a negative
rating action include:
--A substantial increase in leverage which is sustained above 3.0x due to a more
aggressive financial strategy associated with large debt-financed acquisitions,
share repurchases, and/or a severe downturn in operating results.