Hormel Foods Corporation — Form 10-Q
Reporting period: Third quarter and first nine months of fiscal 2013, ended July 28, 2013. Comparisons are with the periods ended July 29, 2012, unless noted. Unaudited figures below are in millions of dollars except per-share data.
Financial performance
| Metric | Third quarter 2013 | Third quarter 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $2,159.5 | $2,008.2 | $6,428.5 | $6,060.5 |
| Gross profit | $330.3 | $307.1 | $1,027.3 | $980.1 |
| Operating income | $180.7 | $171.9 | $565.8 | $562.5 |
| Earnings attributable to Hormel | $113.6 | $111.2 | $368.9 | $367.4 |
| Diluted EPS | $0.42 | $0.41 | $1.37 | $1.37 |
| Gross margin | 15.3% | 15.3% | 16.0% | 16.2% |
Third-quarter sales rose 7.5% and earnings attributable to Hormel rose 2.2%; nine-month sales grew 6.1%, while earnings were nearly flat. Sales growth included SKIPPY, acquired in January, and increased export sales. Third-quarter volume increased 2.6% to 1.19 billion pounds; nine-month volume increased 2.7% to 3.67 billion pounds.
Cash flow and balance sheet: Operating cash flow for the first nine months was $428.8, versus $284.1 a year earlier. Investing used $654.9, including the $665.4 cash purchase of the U.S. SKIPPY business; financing used $126.9. Cash and cash equivalents were $329.5 at July 28, down from $682.4 at October 28, 2012; the company also liquidated $77.4 of short-term marketable securities. Capital spending was $68.7 year to date, and management estimated full-year fiscal 2013 spending of $110–$120.
At July 28, current assets were $1,951.6 and current liabilities $789.5. Long-term debt, excluding current maturities, was $250.0, unchanged from October 2012. The company reported compliance with debt covenants. Dividends declared were $0.17 per share for the quarter and $0.51 for the nine months; the fiscal-year annual rate had increased to $0.68 per share.
Material changes and segment performance
- Grocery Products: Third-quarter sales rose 24.6% and operating profit 32.2%, primarily reflecting SKIPPY and stronger results in selected branded products. Lower MegaMex affiliate earnings partly offset gains.
- Refrigerated Foods: Sales rose 2.4%, but operating profit fell 26.3% in the quarter as high pork input costs pressured margins. Nine-month profit declined 8.5%.
- Jennie-O Turkey Store: Third-quarter operating profit rose 16.7% on value-added growth and operational gains, despite higher grain costs and lower commodity meat prices. Nine-month profit remained down 15.9%.
- Specialty Foods: Third-quarter operating profit rose 7.8%; nine-month profit rose 23.6%. Results benefited from sweetener sales and improved nutrition-product mix.
- International & Other: Third-quarter sales and operating profit rose 31.4% and 34.2%, respectively, supported by SPAM and fresh-pork exports, improved China results, and SKIPPY sales.
Equity earnings from affiliates fell to $1.3 in the quarter and $18.4 year to date, from $9.8 and $28.6, respectively, chiefly because of lower MegaMex earnings, including higher incentive expense, unfavorable exchange rates, and higher input costs.
Outlook, risks, and unusual items
- Management expected Grocery Products and International & Other to continue improving, supported by SKIPPY; it expected Jennie-O to maintain third-quarter momentum and Refrigerated Foods input-cost pressure to moderate toward fiscal year-end.
- Specialty Foods fourth-quarter results were expected to be below the prior year because the SPLENDA foodservice contract expired at the end of July 2013 and raw-material costs remained elevated.
- Management estimated fiscal 2013 SG&A at approximately 7.5% of sales, an effective tax rate of approximately 34%, and interest expense of $12–$14. It expected to acquire the China-based SKIPPY business by fiscal year-end for approximately $42, subject to regulatory approvals and working-capital adjustments.
- The SKIPPY acquisition added $90.9 of third-quarter sales and $177.9 for the first nine months. The company recorded $7.7 of related transaction costs through the third quarter. Purchase accounting included $303.6 of goodwill.
- Commodity, feed-grain, pork, poultry, and peanut price volatility could pressure margins. Management noted that grain-market volatility could affect hedge effectiveness and cause gains or losses to be recognized in future earnings. Commodity hedging losses of $11.3 before tax were in accumulated other comprehensive loss, with most expected to be recognized over the next 12 months.
- Unrecognized tax benefits, including interest and penalties, totaled $22.0; the timing and outcome of tax examinations were uncertain. Standby letters of credit totaled $44.0, including $6.2 for revocable guarantees of an affiliate’s workers’ compensation obligations; these are not recorded on the balance sheet.
- The filing identifies food safety, disease outbreaks, regulation, litigation, labor, international operations, acquisitions, and changing consumer demand as risks. Management did not expect currently known legal matters to materially affect financial condition, results, or liquidity.
Investor verification priorities
- Verify the contribution and profitability of SKIPPY, including the pending China acquisition, its regulatory status, and integration costs.
- Monitor Refrigerated Foods input-cost recovery and Jennie-O’s grain costs, hedge effectiveness, and fourth-quarter performance.
- Assess whether cash generation and liquidity remain adequate after the SKIPPY purchase, dividends, capital spending, and planned repurchases.
- Track MegaMex and other affiliate earnings, as their decline materially offset operating gains.
- Review the SPLENDA contract expiration’s effect on Specialty Foods and the resolution of tax uncertainties and other contingencies.