Hormel Foods Corporation — Q2 FY2023 Form 10-Q
Business context and reporting period. The quarter ended April 30, 2023; six-month comparisons are for the period then ended versus the comparable prior-year periods. Hormel reports Retail, Foodservice, and International segments under a new operating model effective October 31, 2022; prior segment results were recast. Financial amounts below are in millions unless noted.
Financial performance and liquidity
| Metric | Quarter | Six months |
|---|---|---|
| Net sales | $2,977.6; down 3.8% | $5,948.6; down 3.1% |
| Gross profit / margin | $491.4 / 16.5%, versus $553.5 / 17.9% | $987.4 / 16.6%, versus $1,092.2 / 17.8% |
| Operating income | $295.8, versus $334.7 | $585.3, versus $654.4 |
| Net earnings attributable to Hormel | $217.2; down 17.0% | $435.0; down 13.2% |
| Diluted EPS | $0.40, versus $0.48 | $0.79, versus $0.91 |
| Operating cash flow | Six-month cash provided: $411.8, down 28.6% from $577.1 |
Quarterly sales volume fell 5.6%; six-month volume fell 8.8%. For the quarter, lower volume across segments and lower net pricing in some categories more than offset pricing actions. Gross margin weakened on unfavorable mix and persistent inflation. Interest expense rose to $18.3 from $14.7 for the quarter; the six-month amount was $36.7 versus $29.3. The effective tax rate was 22.1% for the quarter and 22.4% year to date, up from 18.7% and 20.5%, primarily because of fewer tax benefits from stock-option exercises.
At April 30, cash and cash equivalents were $580.5, short-term marketable securities $17.5, and total debt $3,303.4, including $9.0 of current maturities. Six-month investing cash outflow was $511.1, including the Garudafood investment; financing cash outflow was $306.7, including $292.6 of dividends and $12.3 of repurchases. Capital expenditures were $90.6. The $750 million revolving facility had no outstanding draws, and the company reported compliance with debt covenants.
Material changes and segment results
- Retail: Quarterly sales fell 4.2% and segment profit fell 19.4% to $153.2. Lower sales, unfavorable mix, and higher operating costs were partly offset by pricing, stronger MegaMex earnings, and improved bacon results.
- Foodservice: Quarterly sales fell 3.1%, but segment profit rose 7.0% to $145.4, mainly on improved mix.
- International: Quarterly sales fell 3.2% and segment profit fell 49.9% to $13.6, reflecting lower China sales and turkey exports.
- Total segment profit declined 11.6% to $312.2. Higher equity-method earnings—$16.9 versus $5.9, mainly from MegaMex—partly offset lower operating results.
In December 2022 and April 2023, Hormel acquired shares in Indonesian food company Garudafood, increasing its ownership to approximately 30%. The $425.8 investment, including transaction costs, was funded with cash and is accounted for under the equity method. Its quoted fair value was $353.9 at April 28, 2023; management reported no other-than-temporary impairment at quarter-end.
Outlook, risks, and contingencies
- For Q3 FY2023, management expects consolidated gross margin as a percentage of sales to decline year over year. It expects Retail profit lower, Foodservice profit higher, and International profit lower than a year ago but sequentially improved from Q2. No numeric full-year sales or EPS outlook is provided in the supplied filing text.
- Management expects FY2023 capital expenditures of approximately $280 million, advertising expense above the prior year, and an effective tax rate of 21%–23%.
- Risks to performance include highly pathogenic avian influenza and turkey availability, reduced fresh pork availability under a new supply agreement, inflation in packaging, logistics, labor and warehousing, consumer price elasticity and softer demand, China and export-market conditions, commodity-price movements, and ongoing elevated feed costs. Protein input costs were expected to be below FY2022 levels for the rest of the year but still above historical levels.
- The company uses commodity and interest-rate hedges. Commodity hedge losses in accumulated other comprehensive loss were expected to be largely recognized over the next 12 months. Management stated anticipated operating income, cash, borrowing capacity, and capital-market access should meet short- and long-term commitments.
- Hormel is a defendant in four groups of antitrust lawsuits involving the pork and turkey industries. It has not recorded reserves, stating it does not believe it will have liability. Management said resolution of currently known legal matters is not expected to materially affect financial condition, results, or liquidity. No material changes to previously reported risk factors were disclosed.
Most important facts for investors to verify
- Whether volume and turkey-supply constraints improve as management anticipates, and the resulting effect on segment sales and margins.
- Whether Foodservice gains can offset continued Retail and International pressure, including China and turkey-export exposure.
- Cash generation after the $425.8 million Garudafood purchase, and the investment’s performance relative to its $353.9 million quoted value.
- Plans for the $950 million notes due in 2024; the filing reports the maturity but does not state a specific refinancing plan.
- Progress toward the $280 million capital-spending estimate and the stated tax-rate and advertising outlook.
- Developments in the antitrust cases, commodity hedges, and other identified operating risks.