Hormel Foods Corporation — Q2 FY2022 Form 10-Q
Reporting period: Second quarter and six months ended May 1, 2022; comparatives are the quarter and six months ended April 25, 2021. Amounts below are in U.S. dollars unless noted.
Business context and performance
Hormel produces branded food products across Grocery Products, Refrigerated Foods, Jennie-O Turkey Store, and International & Other. Results include the Planters snack nuts business, acquired in June 2021; it contributed $239.0 million of Q2 sales and $510.8 million for the first half.
| Metric | Q2 FY2022 | Q2 FY2021 | Change |
|---|---|---|---|
| Net sales | $3.097 billion | $2.607 billion | +18.8% |
| Organic net sales | $2.858 billion | $2.607 billion | +9.6% |
| Gross profit / gross margin | $553.5 million / 17.9% | $476.3 million / 18.3% | Profit +16.2%; margin down 0.4 points |
| Operating income | $334.7 million | $289.4 million | +15.7% |
| Net earnings attributable to Hormel | $261.6 million | $227.9 million | +14.8% |
| Diluted EPS | $0.48 | $0.42 | +14.3% |
For the six months, sales rose 21.2% to $6.141 billion; organic sales increased 11.1%. Net earnings attributable to Hormel were $501.2 million, up 11.3%, and diluted EPS was $0.91, up 11.0%. Total volume was down 2.4% in Q2 and 0.2% year to date; organic volume fell 7.9% and 6.0%, respectively. Sales growth reflected Planters, foodservice strength, and pricing, while costs rose sharply with broad-based inflation.
Segments and material changes
- Grocery Products: Q2 sales +39.1%, substantially reflecting Planters; segment profit fell 8.9% to $89.3 million. Inflation and lower MegaMex earnings more than offset organic growth and Planters contribution.
- Refrigerated Foods: Q2 sales +13.1% and profit +3.0% to $178.5 million, supported by foodservice and pricing; higher operating and logistics costs weighed on results. Volume fell 12.8%, partly reflecting lower commodity sales under a new pork supply agreement.
- Jennie-O Turkey Store: Q2 sales +16.0% and profit rose to $61.8 million from $12.7 million, mainly on higher commodity prices and foodservice performance. HPAI had an immaterial Q2 impact, but is expected to affect later periods.
- International & Other: Q2 sales declined 1.4% and profit declined 3.4% to $23.7 million as export logistics difficulties and higher freight costs offset growth in China.
Total segment profit increased 14.5% to $353.2 million. Equity earnings from affiliates fell 54.8% to $5.9 million, primarily because of lower MegaMex results, including higher avocado costs and other inflation. Net unallocated expense nearly doubled to $31.4 million, reflecting lower Rabbi Trust investment income and higher interest expense.
Cash flow, liquidity, debt, and capital
- First-half operating cash flow was $577.1 million, up from $361.3 million; inventory growth of $226.4 million was a significant use of working capital. Capital expenditures were $128.2 million, versus $85.5 million.
- Cash and cash equivalents were $861.7 million at May 1, 2022, up from $613.5 million at fiscal year-end. Cash was lower than the prior-year comparison, in part because of the Planters acquisition.
- Total debt, including finance leases and other financing arrangements, was $3.302 billion; current maturities were $8.1 million. The company had no revolver borrowings against its $750 million unsecured facility and reported compliance with debt covenants.
- First-half dividends paid were $274.1 million. The fiscal 2022 annual dividend rate increased 6% to $1.04 per share. No shares were repurchased during Q2.
Outlook, risks, and unusual items
- Management expected Q3 diluted EPS to increase marginally year over year after adjusting for prior-year one-time Planters acquisition costs. It expected Q3 gross margin to be above the prior-year quarter but below Q2 FY2022; input-cost inflation was identified as the largest risk. The filing does not state a full-year EPS target.
- Management projected Jennie-O sales volume to decline approximately 30% in the second half because HPAI-related supply gaps were expected across its vertically integrated supply chain. Q3 earnings were expected to be in line with the prior year.
- Grocery Products faced continued inflation pressure until pricing actions expected to take effect in Q4, with volume elasticity and labor constraints additional risks. Refrigerated Foods anticipated a strong year-end finish, while citing inflation and labor availability risks. International & Other faced China COVID-related plant shutdowns and continuing export logistics challenges.
- Other disclosed risks include labor shortages and higher labor costs, commodity and freight inflation, supply-chain disruption, foreign currency exposure, and market volatility. The company reported HPAI detections among supplier farms in Minnesota and Wisconsin, with flock losses, farm quarantines, and control zones.
- The company is a defendant in three sets of pork- and turkey-industry antitrust lawsuits. It recorded no reserves, stating it did not believe it would have liability; it said resolution of known legal matters was not expected to materially affect financial condition, results, or liquidity.
- Rabbi Trust securities generated Q2 losses of $6.6 million, compared with gains of $5.2 million a year earlier. A gain related to corn hedges no longer considered probable was reclassified into earnings in Q2.
Most important facts for investors to verify
- Whether pricing actions offset ongoing raw-material, freight, labor, and operating-cost inflation without materially reducing volume.
- The scale and duration of HPAI-related supply disruption and its effect on Jennie-O’s projected second-half volumes and earnings.
- Organic growth and volume trends separately from the acquired Planters sales contribution.
- Whether cash generation remains sufficient to fund capital spending, dividends, and debt obligations as inventory and other costs evolve.
- Progress and outcomes in the disclosed industry antitrust litigation and state tax audits; the filing does not quantify potential outcomes for these matters.