Tyson income up 5% despite facilities snags

Tyson Foods reported earnings Monday of $258 million in the third quarter, or 75 cents per share.

Earnings increased more than 5 percent compared with last year, but analysts had expected earnings closer to 78 cents per share. Before its conference call, Tyson announced it was selling its operations in Mexico and Brazil to JBS SA, the company's rival in the Hillshire Brands bidding war that ended with Tyson's $8.55 billion cash offer, including debt.

Donnie Smith, Tyson CEO, said in the conference call that a fire at one fully cooked chicken plant and "operational issues" with equipment at another hurt the company in the third quarter.

"We're completely out of fully cooked capacity in our chicken business, which is why we weren't able to move production to other facilities following either event," Smith said. "So we've endured prolonged, sizable production shortfalls in one of our highest revenue, most profitable business during a time when high-priced beef and pork accelerated the demand for chicken."

Smith said more capacity would be online in the spring, alleviating problems.

"Frankly, the only thing keeping us from selling a whole lot more value-added [chicken] is our production capability, so we're getting all that fixed," he said.

Despite setbacks, Tyson reported an 11 percent increase in third-quarter revenue compared with last year. The company had revenue of $9.68 billion, beating analysts expectations by $212 million.

Kenneth Shea, a senior equity analyst at Bloomberg Industries, said he considered the capacity issues a short-term problem and said analysts had been keeping their ears open for any news that could derail the Hillshire acquisition. None came, he said.

"It generally was a good quarter," he said. "It was the absence of any bad news that reassured analysts."

JBS SA will pay $575 million in cash for Tyson's operations in Mexico and Brazil, according to a Tyson news release. The companies expect the sale to go through by late 2014.

"Although these are good businesses with great team members, we haven't had the necessary scale to be a market share leader in either country, which is our preferred position," Smith said. "The proceeds will be used to pay down debt associated with the Hillshire acquisition."

Tyson de Mexico owns three plants and employs more than 5,400 in its plants, offices and seven distribution centers. Tyson do Brasil owns three production plants and employs 5,000.

Tyson will continue to serve customers in Mexico with both U.S.- produced chicken and chicken produced in Mexico, in part through a co-packaging arrangement with Pilgrim's Pride, Tyson said in a news release. Pilgrim's Pride is majority owned by JBS.

In a news release, Tyson said it intends to remain focused on growing its poultry operations in Asia, which include three poultry plants in China and majority ownership of two poultry plants in India. The company's Asian operations employ about 5,000.

In another effort to reduce debt from the planned Hillshire acquisition, Tyson announced it was issuing 24 million shares of stock and 30 million tangible-equity units, according to documents filed with the U.S. Securities and Exchange Commission.

Smith declined to answer questions from analysts regarding the stock and tangible-equity units.

"That should give them significant ammunition, if you will, to make sure the acquisition goes through smoothly without sacrificing their credit rating," Shea said. "It was well received ... because the company is stretching its balance sheet quite a bit."

Monday's barrage of news followed a Friday announcement that Tyson will close facilities in New York, New Mexico and Iowa, leaving 950 out of work.

The company's Cherokee, Iowa, plant will close Sept. 27, while the company's Buffalo, N.Y., and Santa Teresa, N.M., plants are expected to cease operations during the first half of 2015, according to a news release.

During the investor call, Smith said Tyson is now expecting $500 million in cost savings in three years because of the planned acquisition of Hillshire -- $200 million more than Smith outlined during a conference call early in July.

"The more time that we now have gotten to spend with some of the Hillshire folks as we began planning the integration, it's pretty easy to see that there's going to be significant synergies in the supply chain arena, in logistics and operational efficiencies," Smith said.

"Plus, we had an early conversation about latent capacity and the footprint and so as we worked through that, what it made sense to do was, unfortunately, to close those three locations and move that production into more efficient facilities that, frankly, had better supply chain costs as well," he said.

Business on 07/29/2014

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