Hormel Foods Corporation — Q2 FY2019 Form 10-Q
Reporting period: Three and six months ended April 28, 2019; comparisons are to the periods ended April 29, 2018. Amounts are in U.S. dollars.
Business context and results
Hormel manufactures and markets branded food products through Grocery Products, Refrigerated Foods, Jennie-O Turkey Store (JOTS), and International & Other. The company completed the sale of CytoSport, including Muscle Milk and Evolve, to PepsiCo on April 15, 2019.
| Metric | Q2 FY2019 | Q2 FY2018 | First six months FY2019 | First six months FY2018 |
|---|---|---|---|---|
| Net sales | $2,344.7 million | $2,330.6 million | $4,705.1 million | $4,661.9 million |
| Gross profit | $469.1 million | $492.8 million | $957.5 million | $991.1 million |
| Gross margin | 20.0% | 21.1% | 20.3% | 21.3% |
| Operating income | $312.4 million | $301.7 million | $618.6 million | $603.7 million |
| Net earnings attributable to Hormel | $282.4 million | $237.4 million | $523.9 million | $540.5 million |
| Diluted EPS | $0.52 | $0.44 | $0.96 | $1.00 |
| Operating cash flow | Not separately presented for the quarter | $365.6 million | $443.3 million |
Financial position, liquidity, and capital allocation
- At April 28, 2019, cash and cash equivalents were $639.3 million; current assets were $2.251 billion and current liabilities were $1.052 billion.
- Long-term debt, less current maturities, was $250.0 million, down from $624.8 million at October 28, 2018. The company repaid $374.8 million of debt during the first six months, using CytoSport sale proceeds to pay off remaining Columbus acquisition debt.
- Six-month investing cash flow was positive $424.8 million, including $473.9 million in CytoSport sale proceeds. Capital expenditures were $87.6 million, versus $141.2 million a year earlier; FY2019 capital expenditures were estimated at approximately $310 million.
- Six-month financing cash flow was negative $610.5 million, including $212.3 million in dividends, $67.6 million in share repurchases, and the debt repayment. The annual dividend rate was raised to $0.84 per share.
Material changes and segment performance
Q2 net sales increased 0.6%, while volume rose 0.7%. GAAP diluted EPS rose 18.2% to $0.52, but included a $16.5 million pretax gain on the CytoSport sale and a related $17.0 million tax benefit. Excluding the sale gain, adjusted diluted EPS was $0.46, up 4.5%. For the first six months, sales rose 0.9%, but GAAP diluted EPS fell 4.0%; adjusted diluted EPS was $0.90, down 10.0%.
- Grocery Products: Q2 sales increased 2.2% and segment profit increased 12.1%, supported by higher volume and margins. Six-month profit rose 4.7%.
- Refrigerated Foods: Q2 sales rose 1.0%, but profit declined 5.3%; value-added growth did not fully offset weaker commodity profits and capacity-expansion costs. Six-month profit declined 1.2%.
- JOTS: Q2 sales increased 0.5%, while profit fell 44.7%, reflecting startup costs, higher feed costs, and weaker retail sales. Six-month profit declined 20.3%.
- International & Other: Q2 sales declined 8.6% and profit declined 31.3%, primarily from tariffs affecting fresh pork exports and higher freight costs. Six-month profit declined 13.6%.
Outlook, risks, and unusual items
- Management expects FY2019 effective tax rate of 17.5%–19.5%; the filing does not provide a companywide full-year sales or EPS forecast.
- Management expected Refrigerated Foods sales and earnings to grow in the second half on value-added products, while warning that higher pork input costs and delayed pricing actions could compress margins. JOTS expected second-half earnings to decline, including from lower lean-ground-turkey retail sales. International & Other expected sales growth but lower earnings from weak fresh-pork export margins. Grocery Products anticipated second-half volume, sales, and profit declines, partly due to the CytoSport divestiture.
- African swine fever in China, volatile pork prices, tariffs and trade uncertainty, feed and other input costs, freight, and the timing of pricing actions were identified as risks. The filing also describes food safety, disease, supply disruption, litigation, regulatory, foreign currency, and cyber risks.
- The Q2 tax rate was 11.1%, versus 20.0% a year earlier, reflecting tax benefits associated with the CytoSport sale and equity-based compensation. Six-month rates were 16.1% and 10.2%, respectively.
- Operating cash flow declined year over year, primarily due to higher working capital, particularly inventory. The company reported compliance with all debt covenants at quarter-end. It also disclosed $45.6 million of standby letters of credit, primarily for self-insured workers’ compensation, and ordinary-course legal proceedings not expected to materially affect financial condition, results, or liquidity.
Important facts for investors to verify
- Separate recurring operating performance from the CytoSport gain and associated tax benefit; reconcile GAAP and adjusted earnings.
- Track commodity margins, freight, capacity-expansion costs, and whether branded pricing keeps pace with pork and other input-cost increases.
- Monitor JOTS retail recovery and startup/feed costs, as well as the continuing effects of export tariffs and trade uncertainty.
- Assess working-capital trends, especially inventory, alongside planned capital spending and shareholder distributions.
- Review the assumptions behind management’s segment outlook and 17.5%–19.5% full-year tax-rate estimate.