Hormel Foods Corporation — Q1 FY2023 Form 10-Q
Reporting period: Quarter ended January 29, 2023; comparisons are with the quarter ended January 30, 2022, unless otherwise noted. Hormel changed its reportable segments to Retail, Foodservice, and International at the start of FY2023; prior-period segment figures were recast.
Financial performance
| Metric | Q1 FY2023 | Prior period | Change |
|---|---|---|---|
| Net sales | $2,971 million | $3,044 million | Down 2.4% |
| Sales volume | 1,062 million lb. | 1,205 million lb. | Down 11.8% |
| Gross profit / margin | $496 million / 16.7% | $539 million / 17.7% | Profit down 7.9% |
| Operating income | $289 million | $320 million | Down 9.5% |
| Net earnings attributable to Hormel | $218 million | $240 million | Down 9.1% |
| Diluted EPS | $0.40 | $0.44 | Down 9.1% |
| Operating cash flow | $204 million | $384 million | Down 47% |
| Capital expenditures | $37 million | $50 million | — |
Lower volumes in each segment more than offset pricing benefits. Management cited lower commodity pork availability following a new pork supply agreement and reduced turkey supply from highly pathogenic avian influenza (HPAI). Inflation in raw materials, packaging, logistics, and labor, along with unfavorable mix, pressured margins. Cost of products sold declined 1.2% overall but rose 12% on a volume basis.
Segments and material changes
- Retail: Sales of $1,958 million, down 1.9%; segment profit of $155 million, down 8.9%. Lower sales, unfavorable mix, and higher operating costs were partly offset by pricing, improved bacon results, and higher MegaMex earnings.
- Foodservice: Sales of $835 million, down 2.3%; segment profit of $136 million, up 1.2%, driven by improved mix. Some categories benefited from volume growth; lower net pricing in certain categories reflected commodity relief.
- International: Sales of $178 million, down 8.1%; segment profit of $20 million, down 26.9%. Lower turkey and fresh pork exports, weaker China sales, and elevated logistics costs outweighed strong Philippines joint-venture results and growth in some branded exports.
Equity earnings of affiliates rose to $15.6 million from $6.9 million, primarily reflecting improved MegaMex and Philippines joint-venture results. SG&A declined 1.7% to $222 million; advertising was $47 million, comparable to last year. The effective tax rate was 22.6%, versus 22.4%.
Liquidity, debt, and capital allocation
Cash and cash equivalents were $600 million at quarter-end, down from $982 million at October 30, 2022. The decline primarily reflected the $411 million cash-funded purchase of a 29% interest in Indonesian food company Garudafood; investing cash outflow was $451 million. Operating cash flow was also lower, with payments of accounts payable and accrued expenses contributing to the year-over-year change.
Total debt was approximately $3.3 billion, including $3.293 billion of long-term debt net of current maturities. The company had no borrowings under its $750 million revolving credit facility and was in compliance with debt covenants. Cash on hand plus short-term marketable securities totaled approximately $618 million. Management said operating income, cash, and available borrowing capacity should cover short- and long-term commitments.
Cash dividends paid were $142 million. The FY2023 annual dividend rate increased to $1.10 per share, the 57th consecutive annual increase. No shares were repurchased in the quarter. FY2023 capital expenditures were estimated at $350 million.
Outlook, risks, and contingencies
- For Q2 FY2023, management expected consolidated gross margin percentage to decline year over year, citing actions to reduce higher inventory and warehousing costs and near-term margin pressure.
- Retail expected lower sales and significantly lower segment profit in Q2, including lower bacon pricing, unfavorable mix, and higher operating expenses.
- Foodservice expected higher Q2 volume and favorable mix to increase sales and segment profit; risks include weaker industry demand and higher-than-expected operating costs.
- International expected higher Q2 sales but lower segment profit, with export growth and Brazil gains offset by lower turkey and fresh pork exports and continuing China disruption.
- Management forecast a FY2023 effective tax rate of 21%–23%. The filing does not provide a clear full-year sales or EPS outlook.
- Key disclosed exposures include commodity-price and input availability changes, livestock and poultry disease, inflation, labor costs, logistics, foreign-currency movements, China disruption, and market demand. Commodity and interest-rate hedges are used; the company does not currently use market-risk instruments to hedge its foreign-currency exposure.
- The company 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 did not expect resolution of currently known legal matters to materially affect financial condition, results, or liquidity.
Important facts for investors to verify
- Whether pork-supply changes and HPAI-related turkey constraints continue to limit volumes, and how these affect product mix and profitability.
- Whether elevated inventory and warehousing costs produce the anticipated Q2 margin compression and how quickly costs normalize.
- Completion of the Garudafood investment valuation and basis-difference allocation, which was preliminary at quarter-end; the filing states finalization was expected in Q2.
- Operating cash-flow recovery, working-capital trends, and the funding required for the $350 million FY2023 capital-spending estimate and dividends.
- Developments in the antitrust lawsuits, tax audits and uncertain tax positions, as well as the risks described in the company’s latest Form 10-K.