Hormel Foods Corporation — Q1 Fiscal 2015 Form 10-Q
Business context and period: The quarter ended January 25, 2015; comparisons are with the three months ended January 26, 2014. Hormel processes and sells branded and unbranded food products through five segments: Grocery Products, Refrigerated Foods, Jennie-O Turkey Store, Specialty Foods, and International & Other. Results are unaudited interim results and are not necessarily indicative of the full year.
Financial performance
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Net sales | $2.395 billion | $2.243 billion | +6.8% |
| Gross profit | $444.6 million | $398.6 million | +11.5% |
| Gross margin | 18.6% | 17.8% | +0.8 percentage points |
| Operating income | $266.0 million | $237.2 million | +12.1% |
| Net earnings attributable to Hormel | $171.7 million | $153.3 million | +12.0% |
| Diluted earnings per share | $0.64 | $0.57 | +12.3% |
| Operating cash flow | $246.5 million | $314.3 million | −21.6% |
Net sales rose 6.8%, with tonnage up 3.1% to 1.31 billion pounds. The filing reports adjusted net earnings of $187.3 million and adjusted diluted EPS of $0.69, excluding after-tax costs related to the Stockton plant closure and international joint venture exits. These are non-GAAP measures; GAAP earnings and EPS were $171.7 million and $0.64.
Segments
- Grocery Products: Sales +2.0%; segment profit −26.6% to $41.4 million, reflecting $10.5 million in Stockton closure charges, high input costs, and softer sales in some categories.
- Refrigerated Foods: Sales +1.4%; profit +18.6% to $101.2 million. Value-added product growth and lower hog costs supported results, despite lower tonnage.
- Jennie-O Turkey Store: Sales +10.2%; profit +56.2% to $93.0 million, aided by value-added sales, favorable turkey markets, and lower input costs.
- Specialty Foods: Sales +34.3%, largely reflecting the CytoSport acquisition; profit fell 12.6% to $18.6 million due mainly to reduced contract manufacturing.
- International & Other: Sales +17.4%; profit −36.2% to $14.4 million, including $9.5 million of charges related to exiting international joint ventures. China growth was offset partly by export and input-cost challenges.
Cash flow, liquidity, and debt
- Operating cash flow was $246.5 million, down from $314.3 million; management attributed the decline primarily to less favorable working-capital changes.
- Investing activities used $2.8 million, versus $70.1 million used a year earlier. Capital expenditures were $27.7 million; the prior-year period included the $41.4 million SKIPPY China acquisition.
- Financing activities used $49.4 million, including $52.8 million of dividends paid. Cash and cash equivalents increased $192.9 million during the quarter to $527.1 million.
- At January 25, 2015, current assets were $2.246 billion and current liabilities $937.3 million. Long-term debt, less current maturities, was $250.0 million; cash exceeded this reported debt balance by approximately $277.1 million.
- The company reported compliance with all debt covenants. It paid a quarterly dividend of $0.25 per share and raised its fiscal 2015 annual dividend rate to $1.00 per share.
Outlook, commentary, and risks
- Management expects value-added businesses in Refrigerated Foods, Jennie-O, and International & Other to support results. It anticipates lower turkey commodity prices as the year progresses, partly offsetting Jennie-O’s recent gains.
- Management expects Grocery Products and Specialty Foods to contribute growth in the second half, supported by lower input costs, marketing, new products, and CytoSport integration. It expects continued China growth, while West Coast port issues may weigh on exports.
- Fiscal 2015 capital expenditures are estimated at $175–$190 million. SG&A is expected to be 7.5%–7.8% of sales, and the effective tax rate 34.0%–35.0%. No full-year EPS guidance is stated in the supplied filing text.
- Key exposures include volatile meat, poultry, feed, and other commodity costs; livestock disease; food safety and product liability; changing consumer demand; acquisition integration; international trade and currency risks; regulation, litigation, and labor relations. Union contracts covering about 3,400 employees at six facilities expire during fiscal 2015; negotiations had not begun as of the filing.
- Other items to monitor include the preliminary CytoSport purchase accounting and contingent consideration of up to $20 million (with $10.3 million recognized at quarter-end), ongoing federal and state tax audits, and $23.2 million of unrecognized tax benefits. Management said known legal proceedings were not expected to materially affect financial condition, results, or liquidity.
Important facts for investors to verify
- Whether operating cash flow recovers after the weaker working-capital contribution in Q1.
- Whether the first-quarter segment trends persist, particularly Grocery Products and Specialty Foods profitability and Jennie-O’s exposure to easing turkey prices.
- Whether CytoSport delivers the expected synergies, distribution growth, and brand expansion, and whether its purchase-price allocation and contingent payments change.
- Progress on the Stockton closure, international joint venture exits, tax audits, and expiring union contracts.
- Performance against the stated fiscal 2015 capital expenditure, SG&A, and tax-rate outlook; the filing provides no clear full-year EPS target.