In re Tyson Foods, Inc. Sec. Litig.

• Decision Date: 26 July 2017
• Docket Number: Case No. 5:16–cv–05340
• Citation: 275 F.Supp.3d 970
• Parties: IN RE TYSON FOODS, INC. SECURITIES LITIGATION
• Court: U.S. District Court — Western District of Arkansas

275 F.Supp.3d 970

IN RE TYSON FOODS, INC. SECURITIES LITIGATION

Case No. 5:16–cv–05340

United States District Court, W.D. Arkansas, Fayetteville Division.

Signed July 26, 2017

MEMORANDUM OPINION

TIMOTHY L. BROOKS, UNITED STATES DISTRICT JUDGE

I. BACKGROUND

The ready-to-cook chicken that you buy at your local grocery store is called a broiler chicken. Demand for broiler chicken has remained relatively constant, rising slightly but steadily since the 1950s. Furthermore, demand for broiler chicken has been inelastic; that is, insensitive to changes in price. The price for chicken may rise or drop, but the number of consumers who buy chicken remains about the same. As a result, industry-wide profitability is closely tethered to the price of chicken, rather than to expanding or contracting market demand.

This characteristic of the market has historically caused a problem for chicken producers. When the price of chicken is high, producing broiler chicken becomes more profitable. Producers thus bring more chicken to market, increasing supply. The increased supply, coupled with the stable demand, then drives down the formerly-high price. Broiler chickens become less profitable, producers are forced to cut supply, and the price eventually rises again. The cyclical nature of the industry causes "brutal swings" in price, leading to "death matches between chicken producers." (Doc. 43, ¶ 34 (alteration and quotation omitted)).

Defendant Tyson Foods, Inc. is the nation's largest chicken producer, and was traditionally not immune to its industry's volatility. Indeed, for the ten-year period preceding the Great Recession, Tyson's chicken margins fluctuated between 1.2% and 7.0%, and in no two consecutive years was Tyson able to sustain an increase in profit margin. During this time, or more specifically from 2001–2008, the average price per chicken was $0.696/lb for "WOG Broilers"¹ and $0.615/lb for "grade A whole birds." Id. at ¶ 206. But something changed for the industry and Tyson as the Recession took hold and the nation began its slow road to economic recovery. Industry chicken prices increased steadily, hitting an average of $0.967/lb for WOG Broilers and $0.852/lb for grade A whole birds between 2009 to mid-2016. Tyson's chicken margins increased substantially as well. For example, in 2014, Tyson achieved a 7.9% margin. A year later it had increased its margin to 12.0%, and in each of the first three quarters of 2016, Tyson posted margins above 13.0%.

Tyson's financials and its stock prices increased significantly along with these improved margins. From fiscal year 2011 to fiscal year 2014, Tyson's chicken segment's annual operating income "rose from $164 million to $883 million, a more than five-fold increase." Id. at ¶ 38. "In 2013 and 2014, Tyson's chicken segment achieved best-in-history earnings and record-breaking earnings per share." Id. Tyson's $778 million profit in 2013, in fact, was a record high for the company. Id. at ¶ 205. On November 23, 2015, Tyson reported its fiscal year 2015 financial results. They included "full year chicken segment revenues of $11.39 billion and overall revenues of $41.3 billion, chicken segment net income of $1.36 billion and overall net income of $2.17 billion." Id. at ¶ 281. The market responded favorably to these results, and Tyson's stock price rose from $43.65 on November 20, 2015, to $48.09 by close of market on November 23. Id. at ¶ 288.

Tyson's record results continued into the next year. On February 5, 2016, Tyson announced its first quarter financials. It reported "chicken segment revenues of $2.63 billion, overall revenues of $9.15 billion, chicken segment net income of $358 million, [and] overall net income of $776 million." Id. at ¶ 292. Once again the market responded favorably, and Tyson's stock price shot up from $51.95 on February 4, 2016, to $57.10 on the 5th. Id. at ¶ 302. Tyson's second quarter financials were similarly impressive. It achieved "chicken segment revenues of $2.73 billion, overall revenues of $9.17 billion, chicken segment net income of $347 million, [and] overall net income of $704 million." Id. at ¶ 304. And, Tyson's third quarter results followed suit. Its August 8, 2016 disclosures listed "chicken segment revenues of $2.74 billion, overall revenues of $9.4 billion, chicken segment net income of $380 million, [and] overall net income of $767 million."Id. at ¶ 323. In the days following this announcement, Tyson's stock price topped $75.00. Id. at ¶ 333. By September 22, 2016, its stock had reached a high of $76.76. Id. at ¶ 7.

A. Tyson Credits Financial Success to New Strategy

Tyson and certain of its executives attributed this financial success to a variety of factors. One was Tyson's decision to improve its "product mix" by increasing its offerings of "value-added products"; that is, processed chicken products that can be sold for a higher price than commodity chicken parts. Id. at ¶ 42. Frozen chicken fingers might be an example of such a product. As Defendant Donald J. Smith, Tyson's former President and CEO, explained in a 2015 conference call with investors, Tyson's "chicken business model is primarily value-added as a large branded component and is anchored in consumer insights and demand, and has only a small amount of commodity exposure." Id. at ¶ 283. Defendant Noel White, Tyson's COO and former President of Poultry, echoed this sentiment in a 2016 press release, stating that Tyson had "upgraded its product mix into more branded, value-added items." Id. at ¶ 321. Smith reiterated in early 2016 that Tyson was "finding ways to upgrade ... raw material into value-added, high margin opportunities." Id. at ¶ 298. Defendant Donnie King, who was Tyson's President of North American Operations and who Smith labelled "the architect" who had "led the charge" in expanding Tyson's chicken margins, declared in May of 2016 that Tyson "made a conscious decision" to change its business model to be "in a number one brand position" and to "add value to products." Id. at ¶ 314. Defendant Dennis Leatherby, Tyson's CFO, described Tyson's business model as being in "a much better position," in August of 2016, "because [Tyson has] the value-added mix." Id. at ¶ 328.

Coupled with its efforts to change its product mix to include more branded, value-added items, Tyson implemented a newly developed "buy-versus-grow" strategy. Formerly, Tyson would grow—that is, raise from egg to slaughter—substantially all of the chicken it brought to market, rather than purchasing some of its chicken from competing producers. Indeed, as late as 2008, Tyson's then-CFO openly rejected the idea of purchasing some of its supply, stating, "we're not going to ... go out and buy open market meat to subsidize other people's growth." Id. at ¶ 158 (alteration omitted, ellipses in original) (quoting Tyson's then-CFO, Wade Miquelon). But by 2012, Tyson had adopted a markedly different strategy: it began buying chicken from other producers to re-sell to its customers. For example, where Tyson's value-added products called for just a part of the chicken—say, a breast—Tyson would purchase the part from another producer, rather than growing the whole chicken itself. By 2014, this strategy led Tyson to purchase over 4 million pounds of broiler chicken on the open market per week. This figure increased to approximately 10% of Tyson's chicken sales by late 2015, or about 17.6 million pounds per week. Id. at ¶ 160–61.

The buy-versus-grow strategy, according to Tyson executives, had important benefits. For one, it allowed Tyson to better hedge against the cyclical price changes in the broiler chicken industry. As Smith explained in November of 2015, Tyson had "proven that by purchasing up to 10% of [its] chicken needs on the open market and further processing it into value-added convenience foods, [Tyson] can produce strong stable returns even in times of falling commodity chicken pricing."Id. at ¶ 283. King described the strategy's benefit similarly: Tyson's business model is built "with the flexibility so that if chicken margins are really low, if there is excess supply ... we go buy the raw material. In a situation where chicken might be tight, where sales came in much higher than what was projected ... then we would grow the animal." Id. at ¶ 316. White elaborated that "in oversupply situations, when commodity prices are low, we will go into the market and buy raw materials from a number of our competitors, take those products and add value to those through some type of further processing or cooking process." Id. at ¶ 319.

The buy-versus-grow strategy had another financial benefit for Tyson. Rather than growing a whole bird, Tyson could decide to buy only the most desirable parts of the animal—namely, the breasts—to be used in its value-added products. This meant that Tyson would not have to worry about selling the less desirable, and lower priced, portions of the bird—namely, the leg quarters. Smith remarked in February of 2016 that he couldn't remember Tyson ever "selling fewer leg quarters than we are today—and the Buy vs. Grow certainly plays a part of that." Id. at ¶ 298. King confirmed this benefit a few months later, stating that Tyson doesn't "have excess chicken pieces or parts to sell." Id. at ¶ 314.

Tyson also attributed its increased financial outlook to cost-reduction measures. King declared in May of 2016 that Tyson had "taken well over $1 billion out of [its] cost structure." Id. at ¶ 314. White acknowledged these savings a month later, explaining:

We've invested a fair amount of money in our plants and facilities to make sure those structures are right. We've invested in what we call one piece flow, which means that the production processes are all in flow. We gain from an efficiency standpoint, yield standpoint, and more processes we put in place, the better that we've gotten. So there's about $1 billion in costs that have come out of our system.

Id. at ¶ 319. Tyson complimented these...