Hormel Foods Corporation — Q1 FY2017 10-Q
Reporting period: Three months ended January 29, 2017; filed March 10, 2017. Fiscal 2017 is a 52-week year, versus 53 weeks in fiscal 2016 (the extra week was in Q4). Amounts below are in U.S. dollars; financial-statement amounts are converted from thousands to millions where appropriate.
Business context and results
Hormel processes and sells branded and unbranded food products through five segments: Grocery Products, Refrigerated Foods, Jennie-O Turkey Store (JOTS), Specialty Foods, and International & Other. Net earnings attributable to Hormel were essentially flat year over year, while diluted EPS increased to $0.44 from $0.43.
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Net sales | $2,280.2 million | $2,292.7 million | -0.5% |
| Gross profit / margin | $552.3 million / 24.2% | $558.0 million / 24.3% | Profit -1.0% |
| Operating income | $355.4 million | $359.5 million | -1.2% |
| Net earnings attributable to Hormel | $235.1 million | $235.1 million | Approximately flat |
| Diluted EPS | $0.44 | $0.43 | +2.3% |
| Operating cash flow | $177.6 million | $278.7 million | Down $101.1 million |
| Cash and cash equivalents | $609.8 million | $375.2 million at prior-year quarter end | Higher by $234.6 million |
SG&A was $210.2 million, nearly unchanged; equity earnings from affiliates rose 15.9% to $13.3 million. The effective tax rate was 33.7%, versus 33.6%. Dividends declared were $0.17 per share, up from $0.145.
Segments and material changes
- Grocery Products: Sales rose 6.5% to $417.7 million and segment profit increased 0.5% to $65.6 million, supported by Justin’s, SKIPPY, Wholly Guacamole, and Herdez; advertising and Justin’s integration costs partly offset growth.
- Refrigerated Foods: Sales fell 3.4% to $1,123.0 million, mainly reflecting the Farmer John divestiture; profit rose 4.1% to $173.8 million on value-added retail and foodservice growth.
- JOTS: Sales rose 13.1% to $421.0 million, partly against a prior-year comparison affected by highly pathogenic avian influenza (HPAI). Profit fell 25.3% to $68.2 million amid low turkey commodity prices, higher expenses, and competition.
- Specialty Foods: Sales declined 19.0% to $192.6 million following the 2016 Diamond Crystal Brands divestiture; profit was nearly flat at $26.7 million, with Muscle Milk growth offsetting some lost business.
- International & Other: Sales declined 2.1% to $125.8 million, while profit rose 4.8% to $25.5 million, helped by pork export margins. Branded export shipments shifted into Q2; China operations faced high raw-material costs.
Total segment operating profit declined 3.9% to $359.8 million. Lower corporate expense and net interest/investment expense helped keep pretax earnings slightly above the prior-year quarter. Reported sales and tonnage reflect portfolio changes; excluding the Justin’s acquisition and the DCB and Farmer John divestitures, management’s non-GAAP adjusted sales increased 3.3% and adjusted tonnage rose 4.9%.
Cash flow, debt, and liquidity
Operating cash flow was $177.6 million, down from $278.7 million, primarily because of higher working capital; accounts payable and accrued expenses reduced cash flow by $98.1 million. Investing activities provided $105.6 million, including $135.9 million of proceeds from the Farmer John sale, compared with $21.0 million used in the prior-year quarter. Financing activities used $82.2 million, including $76.6 million of dividends and $30.6 million of share repurchases.
At January 29, 2017, cash was $609.8 million, current assets were $2,119.6 million, and current liabilities were $919.8 million (current ratio approximately 2.3). Long-term debt, less current maturities, was $250.0 million; the filing reports no current debt balance. The company said it complied with all debt covenants. Management estimated fiscal 2017 capital expenditures of approximately $200 million. The annual dividend rate increased to $0.68 per share.
Outlook, risks, and unusual items
- Management expected a full-year FY2017 effective tax rate of 33.0%–33.5%; it did not provide full-year revenue, earnings, or EPS guidance in the supplied filing text.
- Management anticipated continued value-added growth in Refrigerated Foods, further Grocery Products momentum (especially in the second half), strong export sales, and favorable pork export margins. JOTS faced continued commodity-price and competitive pressure; China operations faced raw-material costs and Jiaxing plant start-up costs.
- Hog and belly price increases in January caused short-term margin pressure for some value-added products. JOTS bird yields underperformed. Management also cited higher expected input costs in Refrigerated Foods.
- Farmer John was sold on January 3, 2017, for $145 million cash, subject to final working-capital adjustments. The business was not material to annual sales, earnings, or EPS. The quarter’s investing cash flow benefited from the sale.
- Commodity exposure includes hogs, turkey feed grains, and other inputs. The company uses supply contracts and derivatives; the filing provides sensitivity estimates for certain market-price and investment movements. A 10% decline in non-fixed-income rabbi-trust investments would reduce pretax earnings by about $4.1 million.
- Other disclosed risks include food safety and livestock disease, changing commodity prices and supply, competition and consumer preferences, acquisition integration, regulation, litigation, foreign operations, cybersecurity, and labor relations. Two union contracts covering about 150 employees were due to expire in FY2017. Known legal matters were not expected to materially affect financial condition, results, or liquidity.
- The company reported $46.9 million of standby letters of credit, primarily for self-insured workers’ compensation programs, including $4.0 million supporting an affiliated party. These are not recorded as balance-sheet liabilities. Unrecognized tax benefits, including interest and penalties, totaled $20.6 million; the effect or timing of possible changes from state audits was not estimable.
Most important facts for investors to verify
- Whether adjusted sales and volume growth translates into sustained GAAP growth, given the acquisition and divestiture adjustments.
- Whether JOTS profit pressure persists and how turkey pricing, supply, yields, and competition evolve.
- Whether operating cash flow recovers from the working-capital-driven decline, and whether the $200 million capital-spending estimate is achieved.
- Final working-capital adjustments and realized proceeds from the Farmer John sale.
- Whether management’s tax-rate outlook and expected segment trends are borne out; monitor China start-up costs, input costs, export timing, and food-safety or disease risks.