Hormel Foods Corporation — Q1 FY2011 10-Q
Reporting period: First quarter ended January 30, 2011; compared with the quarter ended January 24, 2010. Unaudited interim results. Financial amounts below are in U.S. dollars; millions unless noted. Per-share figures are restated for the two-for-one stock split effective February 1, 2011.
Financial performance and position
| Metric | Q1 FY2011 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $1,921.6 | $1,727.4 | +11.2% |
| Gross profit / gross margin | $374.0 / 19.5% | $318.4 / 18.4% | Margin +1.1 pts |
| Operating income | $235.7 | $175.7 | +34.2% |
| Net earnings attributable to Hormel | $148.8 | $111.2 | +33.8% |
| Diluted EPS | $0.55 | $0.41 | +34.1% |
| Operating cash flow | $165.3 | $113.9 | +$51.4 |
| Capital expenditures | $16.7 | $18.6 | — |
Operating margin was approximately 12.3%, versus 10.2%; net margin was approximately 7.7%, versus 6.4%. These percentages are calculated from reported results. Tonnage increased 3.7% to 1.24 billion pounds.
Cash and cash equivalents were $598.8 at quarter-end, up from $467.8 at October 31, 2010. Current assets were $1,949.2 and current liabilities $1,020.2. Long-term debt of $350.0 was classified as current and scheduled for repayment in Q3 FY2011; the company was exploring refinancing options. The filing reports no other long-term debt balance. Debt covenants were met.
Operating cash flow was $165.3; investing cash outflow was $18.5 and financing cash outflow was $15.8. Cash dividends paid were $27.9 and share repurchases were $13.7. Management estimated FY2011 capital expenditures of $120–130 and annual interest expense of $20–23.
Material changes and segment results
- All five segments increased sales. Refrigerated Foods and Jennie-O Turkey Store were the main profit-growth drivers; Grocery Products and Specialty Foods reported lower segment profits.
- Grocery Products: Sales +5.8%; segment profit −10.4%, primarily from higher pork and beef input costs.
- Refrigerated Foods: Sales +13.3%; segment profit +37.0%, supported by favorable hog-cost/primal-value spreads and strong retail and foodservice sales.
- Jennie-O Turkey Store: Sales +13.9%; segment profit +121.9%, reflecting favorable commodity turkey margins and operating efficiencies.
- Specialty Foods: Sales +2.4%; segment profit −12.0%, affected by raw-material costs, lower contract-packaging sales, and product mix.
- All Other: Sales +17.2%; segment profit +29.4%, aided by exports, currency rates, and international joint ventures.
Equity in earnings of affiliates increased to $6.9 from $2.8, principally from MegaMex and the Philippine joint venture. SG&A was nearly flat at $145.2, while its share of sales declined to 7.6% from 8.4%.
Outlook, risks, and unusual items
- Management expected higher input and fuel costs to pressure margins across segments. Pricing actions were underway or planned to offset some increases.
- Management cautioned that pork margins were unlikely to remain as favorable as in Q1: some benefit was expected in the first half, followed by weaker margins in the second half. Higher turkey production placements and volatile grain costs also posed risks to later-year results.
- Management expected SG&A at approximately 8.0% of sales for the remainder of FY2011 and a full-year effective tax rate of 35–36%. No full-year sales, earnings, or EPS guidance was stated in the provided filing text.
- At January 30, soybean-meal futures covering 260,000 tons were de-designated from cash-flow hedge accounting because they were no longer considered highly effective. Related deferred gains of $17.7 before tax were expected to be recognized mainly over the following 12 months as transactions occurred; future contract gains and losses would run through earnings.
- A 2007 employee stock-option award vested in Q1 after the stock-price condition was met, contributing to higher stock-based compensation expense. The two-for-one stock split was approved January 31 and effected February 1.
- Unrecognized tax benefits, including interest and penalties, totaled $42.2; tax audits could change this balance, but the company said the effect could not be reasonably estimated. A renewable $4.8 standby letter of credit supports an affiliated party’s workers’ compensation obligations and is not recorded as a balance-sheet liability.
- The company identified commodity-price, food-safety, livestock-disease, fuel-cost, labor, regulatory, litigation, and foreign-market risks. It said known legal proceedings were not expected to materially affect its financial condition, results, or liquidity.
Most important facts for investors to verify
- Whether the Q1 benefit from unusually favorable pork and turkey margins persists, particularly given management’s warning about weaker second-half pork margins.
- How effectively pricing actions offset rising commodity, grain, fuel, and other input costs across value-added businesses.
- Repayment or refinancing plans for the $350 million debt maturity scheduled for Q3 FY2011, and continued covenant compliance.
- Whether higher planned capital spending, dividends, and repurchases remain supported by operating cash generation.
- Effects on reported earnings as the de-designated soybean-meal hedge gains are recognized and future related mark-to-market changes flow through earnings.
- Developments in tax audits and the $42.2 million uncertain-tax-position liability, as well as commodity, food-safety, and labor risks.