Fitch Ratings has taken the following rating actions on Tyson Foods,
Inc. (Tyson; NYSE: TSN):
--Long-term Issuer Default Rating (IDR) affirmed at 'BBB';
--Short-term IDR upgraded to 'F2' from 'F3';
--Unsecured bank facility affirmed at 'BBB';
--Senior unsecured notes affirmed at 'BBB'.
The Rating Outlook is Positive.
At the fiscal first quarter ended Dec. 28, 2013, Tyson had approximately
$1.9 billion of total debt.
Upgrade of Short-term IDR
The upgrade of Tyson's short-term IDR reflects the firm's long-term IDR
rating of 'BBB' and Fitch's assessment of Tyson's liquidity and FCF
generation over time. Tyson has generated an average of $571 million of
FCF annually over the past five years and maintains at least $1.2
billion - $1.5 billion of liquidity, inclusive of cash and revolver
availability. Year-end cash balances have averaged $983 million since
2009. Additionally, the firm's cash coverage-to-short-term debt and debt
service metrics consistently meet Fitch's requirements for the 'F2'
rating level. Tyson currently does not have any commercial paper
outstanding.
Positive Outlook, Rating Triggers
The Positive Rating Outlook reflects Fitch's view that Tyson's financial
and business risk has lessened over the past several years, due to
significant debt reduction and structural improvements in operations,
and that there is room in the current ratings. Tyson has paid off over
$1.5 billion of debt since the end of fiscal 2009. The firm also has
fewer fixed price customer contracts, is matching its production with
its demand, is more measured in its use of financial derivatives, and
benefits from being diversified across multiple proteins. Should credit
metrics remain near Fitch's expectations, as discussed below, the
ratings could be upgraded to 'BBB+'.
Key Rating Drivers
Low Leverage, Good Liquidity
Tyson is successfully meeting its goal of total debt-to-EBITDA at 1.3
times (x) or less and liquidity in the $1.2 billion - $1.5 billion range
in most years. For the LTM period ended Dec. 28, 2013, total
debt-to-operating EBITDA was roughly 1.0x and liquidity, inclusive of
$825 million of cash and availability under the firm's undrawn $1
billion revolving credit facility, totaled $1.8 billion.
For fiscal 2014, Fitch projects that total debt-to-operating EBITDA and
operating EBITDA-to-gross interest expense will approximate 1.0x and
20x, respectively. Fitch is also forecasting FFO fixed charge coverage
of over 5.0x and that FCF will exceed $600 million. Tyson's cash flow
priorities include investing in its business, with capital expenditures
projected at $700 million in fiscal 2014, making strategic acquisitions,
and returning cash to shareholders while maintaining low leverage and
ample liquidity.
Ratings Can Accommodate Moderate-Size Acquisitions
Tyson is focused on expanding in value-added prepared foods and in
high-growth international markets. Over the past 12 months, Tyson has
funded three small acquisitions including; Don Julio Foods (Don Julio),
Circle Foods, LLC (Circle Foods), and Bosco's Pizza Co., with internally
generated cash. The purchase price for Don Julio and Circle Foods
totaled approximately $106 million while the price for Bosco's Pizza Co.
was not disclosed.
Based on the current trajectory of Tyson's earnings, Fitch believes the
company can absorb an incremental $1 billion - $1.5 billion of debt to
finance an accretive acquisition and still maintain ratings. Fitch views
leverage near 2.0x as acceptable for Tyson at the 'BBB' level.
Industry Fundamentals and Recent Earnings
Industry margins in beef could continue to be pressured by record low
U.S. cattle supply over the intermediate term while Porcine Epidemic
Diarrhea (PED) disease across farms in the mid-west could challenge pork
processing margins in 2014 due to reduced U.S. hog supplies. However,
low corn prices should support profitability for chicken producers,
result in increased hog weights, and incentivize ranchers to start
rebuilding cattle herds. Additionally, based on the USDA's latest
forecasts, protein demand should remain favorable in 2014 with total red
meat and poultry exports projected to increase 1% and overall U.S. per
capita protein consumption projected to remain stable.
Fitch expects fiscal 2014 to mark the fifth consecutive year of strong
operating performance for Tyson. After absorbing about $1.5 billion of
incremental feed costs during fiscal 2011, 2012, and 2013, Tyson
projects that its feed costs will decline by approximately $600 million
in fiscal 2014.
For fiscal 2014, management also believes operating margins in chicken
could be above its normalized range of 5% - 7% and expects profitability
in pork to be within the 6% - 8% normal range. Tyson has indicated that
margins for beef and prepared foods may be below targets of 2.5% - 4.5%
and 4% - 6%, respectively, due to industry conditions in beef and
investments to grow in value-added.
Fitch views Tyson's normalized segment level margins for chicken, pork,
and prepared foods as reasonable. However, based on historical segment
margins for beef, the firm's 2.5% - 4.5% range may be too high.
Nonetheless, based on each segment's proportional contribution to fiscal
2013 sales, Fitch believes Tyson's consolidated profitability can range
between 4% - 6% on an operating margin basis and 5% - 7% on an EBITDA
margin basis in most years.
During the first fiscal quarter ended Dec. 28, 2013, operating earnings
remained strong, increasing 36% versus prior year to $412 million.
Operating margins in pork, chicken, beef, and prepared foods were 8.5%,
7.5%, 1.6%, and 1.8%, respectively.
Liquidity, Maturities and Debt Terms
As mentioned previously, Tyson's liquidity totaled approximately $1.8
billion at Dec. 28, 2013 and consisted of $825 million of cash and an
undrawn $1 billion unsecured revolver. Following the payoff of $458
million of 3.25% convertible notes that matured on Oct. 15, 2013,
significant upcoming maturities are limited to $638 million of 6.6%
senior unsecured notes due April 1, 2016.
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 senior
unsecured 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 $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 strong credit protection measures 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 $3.5 billion. Tyson has considerable room under
these covenants. At Dec. 28, 2013, total reported debt was $1.9 billion,
and Fitch estimates that debt-to-capitalization was approximately 24%
while EBITDA-to-interest was about four times required levels.
RATING SENSITIVITIES
Fitch views Tyson's ratings as capped at the 'BBB+' rating due to the
firm's low margins and significant exposure to agricultural
supply/demand cycles.
Future developments that may, individually or collectively, lead to an
upgrade to 'BBB+' include:
--Total debt-to-operating EBITDA below 2.0x, with operating performance
that is in line with Fitch's expectations, at least $1 billion of
liquidity, and continued generation of meaningful annual FCF.
Future developments that may, individually or collectively, lead to a
downgrade include:
--A substantial increase in leverage where total debt-to-operating
EBITDA is sustained above 2.5x due to more aggressive financial strategy
associated with debt-financed acquisitions, share repurchases, and/or a
severe downturn in operating results.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology; Including Short-Term Ratings and Parent
and Subsidiary Linkage' (August 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent
and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=818810
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