Hormel Foods Corporation — Q3 FY2021 Form 10-Q
Reporting period: 13 weeks ended July 25, 2021; year-to-date results cover 39 weeks. Comparisons are with the periods ended July 26, 2020, except balance-sheet comparisons, which are with October 25, 2020. Amounts are in U.S. dollars.
Business context and results
Hormel makes and markets branded food products through Grocery Products, Refrigerated Foods, Jennie-O Turkey Store, and International & Other. The quarter included Planters, acquired June 7, 2021. Management reported record quarterly sales, supported by the acquisition, foodservice recovery, pricing, and growth across all four segments and channels.
Key financial metrics
| Metric | Q3 FY2021 | Q3 FY2020 | 39 weeks FY2021 | 39 weeks FY2020 |
|---|---|---|---|---|
| Net sales | $2.864 billion | $2.381 billion | $7.931 billion | $7.188 billion |
| Gross profit | $423.3 million | $422.4 million | $1.350 billion | $1.368 billion |
| Gross margin | 14.8% | 17.7% | 17.0% | 19.0% |
| Operating income | $207.5 million | $249.6 million | $764.9 million | $823.5 million |
| Net earnings attributable to Hormel | $176.9 million | $203.1 million | $627.1 million | $673.7 million |
| Diluted EPS | $0.32 | $0.37 | $1.15 | $1.23 |
| Adjusted diluted EPS (non-GAAP) | $0.39 | $0.37 | $1.21 | $1.23 |
Reported quarterly sales rose 20.2%, while organic sales rose 14.3%; reported year-to-date sales rose 10.3%, and organic sales rose 7.9%. The filing defines organic measures as excluding acquisitions and divestitures. Quarterly segment profit increased 1.6% to $267.8 million, but earnings before taxes fell 21.3% to $204.2 million. Gross margin contracted as inflation in raw materials, freight, labor, and other inputs outpaced pricing actions.
Cash flow and balance sheet: Operating cash flow was $437.8 million for the 39 weeks, versus $878.1 million a year earlier. Investing cash outflow was $3.530 billion, principally reflecting Planters; financing cash inflow was $1.664 billion. Cash and equivalents were $291.4 million at July 25, versus $1.714 billion at October 25. Total debt was $3.325 billion, compared with $1.304 billion; the company issued $2.3 billion of notes to help fund Planters and repaid $250 million of notes at maturity. No revolving-facility draws were outstanding; the $750 million facility expires in 2026, with a conditional $375 million increase option. Hormel reported compliance with debt covenants.
Material changes and unusual items
- Planters was acquired for a preliminary $3.4 billion. It contributed $141.3 million of sales from acquisition through quarter-end; post-acquisition net income was not discernible. Preliminary purchase accounting recorded $2.287 billion of goodwill and $798 million of other intangibles.
- Planters-related transaction costs and acquired-inventory revaluation increased expenses by a combined $40.4 million in Q3 and $43.2 million year to date. Adjusted EPS excludes these costs and adjustments; reported and adjusted results should not be conflated.
- Quarterly foodservice recovery aided Refrigerated Foods and Jennie-O. Jennie-O segment profit nevertheless fell 16.9% in Q3 and 37.6% year to date, primarily due to higher feed costs. International & Other profit rose on export margins and international results.
- Cash flow from operations declined year over year, with higher inventories and Planters-related receivables and inventory cited as factors. Capital expenditures were $139 million year to date.
Outlook, commentary, and risks
- Management expected a high-cost environment to persist through the rest of FY2021. It expected Q4 gross margin to improve sequentially as additional pricing took effect, while warning that faster input-cost inflation was the largest risk to that expectation.
- Management forecast FY2021 capital expenditures of approximately $260 million and an effective tax rate of 19.0%–20.5%. Segment commentary anticipated Q4 growth in Grocery Products and improved Refrigerated Foods results; Jennie-O expected better portfolio results but flagged dramatically higher grain costs. International & Other expected continued export strength, subject to shipping interruptions.
- Labor shortages constrained production in Grocery Products and Refrigerated Foods. The company also cited inflation in raw materials, packaging, freight, labor, and supplies; COVID-19 disruption; commodity and supply-chain volatility; and international shipping risks.
- The filing describes three sets of antitrust lawsuits concerning the pork and turkey industries. Hormel had not established reserves, stating it did not believe it would have liability. Management did not expect currently known legal proceedings, individually or collectively, to materially affect financial condition, results, or liquidity. A federal court ruling was also reducing harvest capacity and increasing labor costs pending resolution.
- The annual dividend rate increased to $0.98 per share, the 55th consecutive annual increase. Disclosure controls were assessed as effective; management planned to exclude the newly acquired Planters business from its year-end internal-control assessment, as permitted by SEC rules.
Important facts for investors to verify
- How Planters performs after integration and whether final purchase-price allocations differ materially from the preliminary estimates.
- Whether pricing actions catch up with input-cost inflation and support the expected Q4 margin improvement.
- Whether operating cash flow and working capital improve after the acquisition-related cash use and inventory build.
- Debt, interest expense, and covenant headroom following the $2.3 billion note issuance.
- Developments in labor availability, harvest capacity, foodservice demand, commodity markets, shipping, COVID-19 effects, and the disclosed antitrust proceedings.