Fitch Affirms Tyson's IDRs at 'BBB/F3'; Revises Outlook to Positive
CHICAGO -- February 5, 2013
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 reported debt.
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 earnings.
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
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
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
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 flow growth.
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
Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'2013 Outlook: U.S. Commodity Protein, Produce, and Dairy; Structural
Changes to Continue as Costs Remain High and Europe Will Be A Challenge' (Dec.
Applicable Criteria and Related Research:
Corporate Rating Methodology
2013 Outlook: U.S. Commodity Protein, Produce, and Dairy
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Carla Norfleet Taylor, CFA
70 W. Madison Street
Chicago, IL 60602
Wesley E. Moultrie, II CPA
David E. Peterson
Brian Bertsch, +1-212-908-0549 (New York)
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