Hormel Foods Corporation — Q1 FY2018 Form 10-Q
Reporting period: Three months ended January 28, 2018; comparable quarter ended January 29, 2017. Amounts below are in U.S. dollars. The filing notes that interim results are not necessarily indicative of full-year results.
Financial performance
| Metric | Q1 FY2018 | Prior comparable quarter | Change |
|---|---|---|---|
| Net sales | $2.331 billion | $2.280 billion | +2.2% |
| Organic net sales | $2.198 billion | $2.180 billion | +0.8% |
| Gross profit | $502.2 million | $552.3 million | -9.1% |
| Gross margin | 21.5% | 24.2% | -2.7 percentage points |
| Operating income | $306.6 million | $355.4 million | -13.7% |
| Earnings before income taxes | $305.2 million | $354.8 million | -14.0% |
| Net earnings attributable to Hormel | $303.1 million | $235.1 million | +28.9% |
| Diluted EPS | $0.56 | $0.44 | +27.3% |
| Cash from operating activities | $304.2 million | $195.2 million | +$108.9 million |
EPS and net earnings rose despite lower operating income, largely because the Tax Act reduced the quarter’s tax provision. The effective tax rate was 0.6%, versus 33.7% a year earlier. The company recorded a provisional $68.0 million non-cash benefit from revaluing deferred tax liabilities and a $5.2 million charge for deemed repatriation of foreign earnings. Separately, $11.8 million of excess stock-compensation tax benefits reduced tax expense.
Segments and material changes
- Grocery Products: Sales increased 0.6% to $613.9 million and segment profit rose 8.2% to $100.0 million, supported by MegaMex, Wholly Guacamole, Herdez, Skippy and Justin’s. A one-time MegaMex tax gain contributed.
- Refrigerated Foods: Sales rose 4.8% to $1.176 billion, reflecting Columbus and Fontanini acquisitions, but segment profit fell 17.8% to $142.9 million. Higher hog costs, freight, Columbus transaction costs and the Farmer John divestiture weighed on results.
- Jennie-O Turkey Store: Sales declined 7.2% to $390.6 million and segment profit fell 26.8% to $49.9 million. Oversupply, lower turkey commodity prices and reduced whole-bird sales were key factors.
- International & Other: Sales increased 19.5% to $150.3 million, primarily from Ceratti and export growth; segment profit decreased 3.2% to $24.7 million, partly due to higher export product costs.
Reported sales included the impact of acquisitions and the Farmer John divestiture. Organic volume declined 1.6%; total reported volume fell 4.4%. Cost of products sold increased 5.9%, reflecting higher hog, pork-belly, beef and pork-trim costs, as well as freight pressure.
Cash, debt and liquidity
- Cash and cash equivalents were $385.8 million at quarter-end, down from $444.1 million at October 29, 2017. The cash-flow statement reports a $58.3 million decrease during the quarter.
- Operating cash flow was $304.2 million. Investing activities used $905.3 million, including $857.6 million for Columbus and $53.7 million of capital expenditures.
- Financing activities provided $538.2 million. Columbus was funded partly with $375 million of term-loan borrowing and $375 million drawn under the revolving facility; $120 million was paid down during the quarter.
- At January 28, short-term debt was $255.0 million and long-term debt was $624.7 million, approximately $879.7 million combined. At October 29, 2017, long-term debt was $250.0 million and short-term debt was nil.
- Current assets were $1.948 billion and current liabilities $1.324 billion. The company reported compliance with all debt covenants.
- Dividends declared were $0.1875 per share; the fiscal 2018 annual dividend rate increased to $0.75 per share. Dividends paid during the quarter were $89.8 million. Share repurchases totaled $25.2 million.
Outlook, commentary and risks
- Management expects a fiscal 2018 effective tax rate of 17.5%–20.5%; Tax Act calculations remain provisional and may be refined during the measurement period, ending no later than Q1 FY2019.
- Estimated fiscal 2018 capital expenditures are approximately $425 million, including bacon capacity expansion, a new whole-bird facility, Austin plant modernization and value-added capacity projects.
- Management cited higher hog costs, depressed turkey commodity markets and elevated freight as near-term profit challenges. It expects Grocery Products sales growth in Q2, but anticipates margin pressure from promotions, freight and raw-material costs. Refrigerated Foods expects Q2 sales growth and segment-profit growth, while turkey market and freight pressures are expected to continue. International & Other anticipates Q2 growth from China and Ceratti.
- Marketing and advertising expense was lower in Q1, but management expects it to increase more than 20% for the fiscal year.
- Key risks include commodity price and supply volatility, turkey-market oversupply, food safety and livestock disease, acquisition integration and valuation, freight and labor costs, regulation, litigation, international exposure and cybersecurity. The union contract at the Rochelle, Illinois facility expired February 25, 2018; negotiations were continuing under an indefinite extension.
- The company reported ordinary-course legal proceedings and said resolution of currently known matters was not expected to materially affect financial condition, results or liquidity. Standby letters of credit totaled $48 million, including $4 million supporting an affiliate; these were not recorded as liabilities.
Important facts for investors to verify
- How much reported earnings and EPS growth reflects the one-time Tax Act benefit and stock-compensation tax benefits, versus recurring operating performance.
- Whether higher input and freight costs can be offset by pricing, mix, productivity or customer arrangements, particularly in Refrigerated Foods and Jennie-O Turkey Store.
- Columbus acquisition integration, final purchase-price allocation, acquired intangible values and the effect of acquisition financing on debt and interest expense.
- Progress toward the $425 million capital-spending plan and the company’s ability to sustain operating cash flow, dividends and debt reduction.
- Whether management’s segment outlook and fiscal 2018 tax-rate estimate remain achievable as commodity markets, freight costs and provisional tax accounting evolve.