Fitch Ratings upgrades the following Tyson Foods ratings to BBB from BBB-: long-term issuer default rating, unsecured bank facility, senior unsecured notes, senior guaranteed unsecured notes
February 7, 2012
– Fitch Ratings has upgraded the Issuer Default Rating (IDR) and other debt ratings of Tyson Foods, Inc. (Tyson; NYSE: TSN) as follows:
--Long-term IDR to 'BBB' from 'BBB-';
--Unsecured bank facility to 'BBB' from 'BBB-';
--Senior unsecured notes to 'BBB' from 'BBB-';
--Senior guaranteed unsecured notes to 'BBB' from 'BBB-'.
Fitch has concurrently affirmed the following rating: --Short-term IDR at 'F3'.
The Rating Outlook is Stable.
These rating actions affect approximately $2.2 billion of total reported debt, consisting mainly of senior unsecured notes, at the fiscal first quarter ended Dec. 31, 2011.
The rating upgrade reflects Fitch's view that Tyson's conservative financial strategy, improved operating efficiency, and prudent risk management practices are strengthening the company's on-going credit profile and reducing future business risk. Lower debt balances and more efficient operations should help mitigate the negative effects volatility in the commodity protein industry can have on the firm's operating earnings and cash flow. Tyson's diversification in chicken, beef, and pork plus its considerable scale, represented by its $32.3 billion of annualized sales during fiscal 2011, are credit positives. Each protein is subject to different production cycles and varying supply/demand dynamics; therefore, weakness in one or more proteins usually can be offset by strength in others. During 2011, weakness in chicken was partially offset by strong performance in pork and beef. In 2012, Fitch expects meaningful improvement in Tyson's chicken segment to help mitigate below normal operating margins in beef. Tyson has generated over $1.7 billion of cumulative internally generated FCF over the three years ended Oct. 1, 2011 and has used most of this cash to pay off about $1.3 billion of debt. The company's financial strategy is to maintain total debt-to-EBITDA at 1.3 times (x) or less and liquidity of $1.2 billion-$1.5 billion.
Fitch believes a meaningful portion of Tyson's target liquidity will consist of cash as the firm's year-end cash balance has averaged over $500 million during the five-year period ended Oct. 1, 2011. The remaining liquidity will consists of revolver availability Structural changes related to customer sales contracts, live production, yields and mix across Tyson's operations have garnered significant operating efficiencies. Since 2008, the firm has realized over $800 million of improvements from its chicken segment alone. Tyson has closed inefficient plants in beef and has strategically located both beef and pork processing facilities near its supplier base. Lastly, the firm is using a low risk option strategy along with shorter duration hedge positions and customer sales agreements to limit downside caused by volatility in product prices and grain costs. Fitch's outlook for the U.S. protein is currently stable, despite relatively high grain costs. In aggregate, global demand remains strong and total red meat and poultry supply is mostly stable. Across individual proteins, profitability in chicken is expected to improve on reduced production, which should result in lower supply and better pricing, while the leading pork processors continue to experience higher than normal profitability. Red meat processing margins, particularly in beef, have been extremely volatile as changes in carcass cut-out values have not always kept pace with high livestock costs. Fitch believes Tyson's processing margins benefit from its product mix and its strong relationship with customers and suppliers.
The company has realized modest pricing in chicken even though industry prices have declined. In addition to skilled in house staff, the beef and pork segments have alliances with suppliers that help with procurement. Tyson's $32 billion of fiscal 2011 sales were 33%, 41%, 16%, and 10% chicken, beef, pork and prepared foods, respectively. The firm views normalized operating margins as 6-8% in pork, 5-7% in chicken, 4-6% in prepared foods, and 2.5-4.5% in beef. Based on each of these segments' contribution to Tyson's fiscal 2011 sales, this equates to a normalized consolidated operating margin of 4-6%. Consolidated operating margins have recently declined from the highs experienced in fiscal 2010 but remain good versus history and continue to exceed Fitch's expectations. Fitch believes Tyson can continue to outperform the broader protein industry as it has in chicken. This is because the majority of the previously mentioned operational improvements are viewed as permanent and should position the firm to better withstand challenging operating environments. During fiscal 2012, Tyson expects pork margins to remain above normalized levels, profitability in chicken to improve on better pricing and an additional $125 million of operational improvements, and beef to return to its normalized range in the second-half of the fiscal year.
Recent Operating Performance:
During the first quarter ended Dec. 31, 2011, consolidated sales grew 9.4% to $8.3 billion due mainly to 14.6% pricing being partially offset by 5% lower volumes. Operating income declined to $278 million from a record $498 million last year resulting in an operating income margin of 3.3%. For the comparable period last year, the firm's operating margin was well above normal levels at 6.5%. Tyson's current profitability reflects record performance in pork, material year-over-year operating income growth in prepared foods, and sequential improvement in chicken that was partially offset by weak performance in beef. Tyson's cash flow remained robust during the most recent quarter, despite the decline in its operating income. Cash flow from operations was $338 million versus $371 million in the same period last year due chiefly to improvements in working capital related to inventory. FCF was $141 million versus $198 million last year as capital expenditures have increased to support operating efficiencies and growth in foreign operations.
During the latest 12 month (LTM) period ended Dec. 31, 2011, total debt-to-operating EBITDA was 1.5x and operating EBITDA-to-gross interest expense was around 6.0x. Tyson's leverage has been below 2.0x times for eight consecutive quarters while interest coverage has averaged over 6.0x for the same period. The firm generated $287 million of FCF, modestly below its 10-year historical average of about $330 million but still good for the rating category. Fitch expects total debt-to-operating EBITDA to remain in the low-to-mid 1.0x range in the near term and average less than 2.0x over time due to solid consolidated operating performance and a stable to moderately lower debt balance. Annual FCF generation is expected to remain positive and in line with the company's historical average over the long term. Tyson's ratings have room to absorb modest additional leverage should the firm's beef operation not recover as quickly as anticipated or pork does not sustain its recent record performance. However, negative ratings actions could occur if leverage increases and is sustained above 3.0x due to a more aggressive financial strategy associated with large debt-financed acquisitions or share repurchases and/or a severe downturn in operating results. Liquidity, Upcoming Maturities, & Significant Debt Terms: Tyson's liquidity, which totaled $1.7 billion at Dec. 31, 2011, is supported by a large cash balance, an undrawn $1 billion unsecured revolver, and continued generation of meaningful FCF.
Cash at Dec. 31, 2011 totaled $857 million and revolver availability was $855 million, after considering $145 million of letters of credit. Tyson's revolver expires Feb. 23, 2016 or Nov. 29, 2013 if the company has not achieved certain investment grade ratings or has not addressed its 2014 maturity as outlined by the credit agreement. Tyson must refinance, repurchase, defease or restrict cash to pay off these notes in a blocked account. As of Dec. 31, 2011, none of these events had occurred. Tyson does not have any significant scheduled debt maturities until fiscal 2014. During fiscal 2014, the firm has $458 million of 3.25% convertible notes due Oct. 15, 2013 and $810 million of 10.5% senior unsecured notes maturing March 1, 2014. Fitch believes management's outlook for its business, as discussed earlier, is realistic and expects Tyson to pay down debt as necessary to maintain leverage within its targeted range of 1.3x or less. Tyson has indicated that it will continue to use available cash to repurchase notes when they are available at attractive prices. The company also intends to use current cash and cash flow from operations for principal payments should conditions for early conversion of its 2013 convertible debt be met. Financial maintenance covenants in Tyson credit facility include maximum total debt-to-EBTIDA and minimum EBITDA-to-interest requirements of 3.5x and 3.0x, respectively.
Maximum leverage may increase to 4.0x under certain circumstances such as for permitted acquisitions. Fitch estimates that Tyson's EBITDA would have to drop by over 60% or total debt would have to more than double to breach these covenants. Tyson's credit facility is guaranteed by substantially all domestic subsidiaries, but its senior notes have different level of guarantees. This is because a substantial portion of the debt was issued when operating fundamentals were weak and the firm's ratings were high yield. Given Tyson's investment grade profile and low probability of default, Fitch does not delineate ratings based on these guarantees.