Hormel Foods Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended July 31, 2022; comparable periods ended July 25, 2021. Fiscal 2021 included an extra week in its fourth quarter. Amounts below are in U.S. dollars unless noted.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $3.034 billion | $2.864 billion | $9.175 billion | $7.931 billion |
| Gross profit / margin | $506.0 million / 16.7% | $423.3 million / 14.8% | $1.598 billion / 17.4% | $1.350 billion / 17.0% |
| Operating income | $291.0 million | $207.5 million | $945.4 million | $764.9 million |
| Net earnings attributable to Hormel | $218.9 million | $176.9 million | $720.1 million | $627.1 million |
| Diluted EPS | $0.40 | $0.32 | $1.31 | $1.15 |
| Operating cash flow | Not separately stated for quarter | Not separately stated for quarter | $763.2 million | $437.8 million |
- Quarterly sales rose 6.0%, while organic sales increased 2.7%; reported volume fell 9.0% and organic volume fell 11.1%. For the nine months, sales rose 15.7% and organic sales 8.0%, while volume declined 3.1% and organic volume 7.7%.
- Quarterly reported diluted EPS increased 25%. On the company’s non-GAAP adjusted basis, EPS was $0.40 versus $0.39, up 2.6%; prior-year adjusted results exclude $40.4 million of Planters acquisition costs and inventory revaluation charges. Nine-month adjusted EPS was $1.31 versus $1.21, up 8.3%.
- Quarterly gross margin improved to 16.7% from 14.8%, supported by Jennie-O profitability, Planters, pricing and a shift away from lower-margin commodity sales. Broad-based input-cost inflation remained a headwind.
- Cash and cash equivalents were $850.3 million, versus $613.5 million at October 31, 2021. Current assets were $3.403 billion and current liabilities $1.420 billion. Inventories increased to $1.679 billion from $1.369 billion.
- Total debt, including current maturities, was $3.303 billion; cash less total debt was approximately $2.453 billion. The $750 million revolving credit facility had no outstanding draws, and the company reported compliance with debt covenants.
- Nine-month investing cash outflow was $171.8 million, including $189.2 million of capital expenditures. Financing cash outflow was $344.5 million, including $415.9 million of dividends paid. Fiscal 2022 capital expenditure target was $310 million.
Segment performance and material changes
- Grocery Products: Quarterly sales rose 24.5%, largely reflecting Planters and organic demand, but segment profit fell 5.3% amid inflation and weaker MegaMex results.
- Refrigerated Foods: Quarterly sales increased 2.2% and profit 15.6%; value-added and foodservice strength outweighed higher operating and logistics costs and lower commodity profitability. Volume declined, primarily due to reduced commodity sales under a new pork supply agreement.
- Jennie-O Turkey Store: Quarterly sales declined 7.7%, while profit increased to $37.4 million from $5.9 million, helped by higher commodity prices and foodservice sales. Highly pathogenic avian influenza (HPAI) constrained supply.
- International & Other: Quarterly sales fell 4.7% and profit 9.2%, as lower exports, logistics disruption and higher freight costs outweighed stronger results in some markets.
- Planters contributed $243.1 million of quarterly sales and $753.9 million for the first nine months. Its post-acquisition net earnings are not separately discernible. Prior-year comparisons included acquisition-related charges that lifted current-period reported growth relative to adjusted comparisons.
- Quarterly other comprehensive loss was $61.9 million, including foreign currency translation and deferred hedging losses; this reduced comprehensive income despite higher net earnings.
Outlook, risks and unusual items
- Management expected fourth-quarter gross margin to improve sequentially, with input-cost inflation the principal risk to that expectation. Grocery Products expected improved results versus Q3; Refrigerated Foods expected profit to decline year over year; Jennie-O expected significant Q4 profit growth but sales volume to fall approximately 30%; International & Other anticipated growth, subject to shipping and China-related risks.
- Jennie-O’s supply and production were affected by HPAI. The filing said the impact was expected to reduce turkey production volume at least through fiscal 2023’s first quarter. Export logistics, COVID-related restrictions and temporary plant shutdowns in China, and persistent inflation were also cited risks.
- Management expected the fiscal 2022 effective tax rate to be 20.5%–22.5%. The quarter’s rate was 24.5%, versus 13.3% a year earlier, primarily reflecting fewer tax benefits from stock-option exercises and prior-year tax benefits.
- The company announced a transition to three operating segments—Retail, Foodservice and International—beginning fiscal 2023; reporting under that structure was to start in Q1 2023.
- Subsequent to quarter-end, a strike began at the Fresno facility involving approximately 50 workers represented by the Bakery, Confectionery, Tobacco Workers and Grain Millers’ union; the company said it continued operating at reduced capacity while seeking resolution.
- The Inflation Reduction Act was signed after quarter-end. Hormel was evaluating potential effects of its corporate minimum tax and stock-repurchase excise tax provisions. The filing also disclosed three sets of industry antitrust lawsuits; Hormel had not recorded reserves and did not believe it would have liability. Other currently known legal matters were not expected to materially affect results, financial condition or liquidity.
- Management said operating cash flow, cash on hand and borrowing capacity were expected to cover short- and long-term commitments. The filing provided no clear full-year earnings-per-share guidance.
Most important facts for investors to verify
- Whether pricing continues to offset inflation without materially weakening demand or volumes, particularly in Grocery Products.
- How HPAI affects Jennie-O supply, sales volumes and the expected recovery through fiscal 2023’s first quarter.
- Whether the Fresno strike, export shipping constraints and China conditions affect production, sales or segment profit.
- Whether operating cash flow converts into cash after inventory needs, capital expenditures, dividends and debt obligations.
- The eventual effect of the Inflation Reduction Act, tax audits and antitrust litigation, and the comparability of results following the fiscal 2023 segment reorganization.