Hormel Foods Corporation — Fiscal 2021 Form 10-K
Reporting period: Fiscal year ended October 31, 2021, comprising 53 weeks. The filing also reports fourth-quarter results. Hormel is a branded food company with four segments: Grocery Products, Refrigerated Foods, Jennie-O Turkey Store, and International & Other.
Financial performance
| Metric | Fiscal 2021 | Fiscal 2020 | Change |
|---|---|---|---|
| Net sales | $11.386 billion | $9.608 billion | +18.5% |
| Organic net sales (non-GAAP) | $10.940 billion | $9.608 billion | +13.9% |
| Gross profit | $1.928 billion | $1.826 billion | +5.6% |
| Gross margin | 16.9% | 19.0% | Down 2.1 percentage points |
| Operating income | $1.123 billion | $1.100 billion | +2.0% |
| Net earnings attributable to Hormel | $909 million | $908 million | +0.1% |
| Diluted EPS | $1.66 | $1.66 | Flat |
| Adjusted diluted EPS (non-GAAP) | $1.73 | $1.66 | +4.2% |
| Operating cash flow | $1.002 billion | $1.128 billion | Down $126 million |
| Capital expenditures | $232 million | $368 million | Down $136 million |
Sales growth reflected the Planters acquisition, higher pricing, and recovering foodservice demand. Organic volume rose 0.5% for the year. Earnings were essentially flat as inflation in raw materials, freight, labor, and supplies offset higher sales. The filing attributes $37 million, or approximately $0.06 per share after tax, of acquisition costs and accounting adjustments to fiscal 2021; adjusted results exclude these items.
Fourth-quarter results
Net sales were $3.455 billion, up 42.8%; net earnings were $282 million, up 20.2%; and diluted EPS was $0.51 versus $0.43. Organic net sales increased 31.6% and organic volume increased 8.2%. The comparisons benefited from Planters and a foodservice recovery; gross margin was 16.7%, down from 18.9% a year earlier.
Segments
| Segment | FY2021 sales | Sales change | FY2021 segment profit | Profit change |
|---|---|---|---|---|
| Grocery Products | $2.809 billion | +17.8% | $382 million | +6.8% |
| Refrigerated Foods | $6.333 billion | +20.2% | $665 million | +9.1% |
| Jennie-O Turkey Store | $1.495 billion | +12.1% | $76 million | -28.0% |
| International & Other | $748 million | +20.9% | $116 million | +23.6% |
Refrigerated Foods benefited from foodservice recovery and pricing, which offset higher costs. Grocery Products gained from Planters and organic sales. Jennie-O profit declined mainly from higher feed and freight costs. International & Other improved on exports, China, and joint-venture earnings.
Liquidity, debt, and capital returns
- Cash and cash equivalents were $614 million at year-end, down from $1.714 billion. Current assets were $2.948 billion and current liabilities were $1.416 billion.
- Long-term debt, including current maturities, was approximately $3.324 billion, compared with $1.304 billion a year earlier. Hormel issued $2.3 billion of long-term debt in fiscal 2021, principally to help fund the Planters acquisition; it also repaid $250 million of notes at maturity. No revolving credit facility borrowings were outstanding, and the company reported compliance with debt covenants.
- Investing cash outflow was $3.626 billion, primarily reflecting the $3.4 billion Planters purchase. Financing cash inflow was $1.521 billion.
- Cash dividends paid were $523 million. The fiscal 2022 annual dividend rate increased 6% to $1.04 per share, marking the 56th consecutive annual increase. Fiscal 2021 repurchases totaled approximately $20 million.
- Management expects fiscal 2022 capital expenditures of approximately $310 million. It stated operating cash flow, cash on hand, and borrowing capacity should be adequate for commitments.
Outlook, risks, and unusual items
- Management expects sales and earnings growth in all four segments in fiscal 2022, with consolidated growth above its long-term growth algorithm. No specific fiscal 2022 revenue or EPS target is provided.
- Expected growth drivers include a full year of Planters, pricing actions, elevated demand, improved production throughput, and added capacity in pizza toppings and dry sausage. Management expects gross margin to improve from fiscal 2021, but cites incremental inflation as the largest risk.
- A new pork supply agreement is expected to reduce fiscal 2022 sales by approximately $350 million cumulatively in Refrigerated Foods and International & Other, primarily through lower commodity sales.
- Management identifies industry labor shortages, inflation, supply-chain disruption, and input-cost volatility as key risks. COVID-19-related incremental supply-chain costs were approximately $21 million in fiscal 2021, compared with approximately $80 million in fiscal 2020.
- Other material exposures include disease outbreaks affecting livestock or poultry, food safety and product liability, customer concentration (Walmart represented about 15% of fiscal 2021 gross sales), international trade and currency risks, and acquisition integration and valuation risks.
- Planters was acquired in June 2021 for $3.4 billion and contributed $411 million of sales after acquisition. It represented approximately 4% of consolidated sales and total assets; its internal controls were excluded from management’s and the auditor’s year-end internal-control assessment while integration continued. No goodwill or indefinite-lived intangible impairment was recorded in fiscal 2021.
- Hormel is a defendant in three groups of antitrust lawsuits concerning the pork and turkey industries. It reported no reserves, stating it did not believe it would have liability; management said currently known litigation was not expected to materially affect results, financial condition, or liquidity.
- The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Critical audit matters included valuation of pension alternative investments and acquired Planters trade names.
Investor verification priorities
- Track whether pricing and productivity offset continued inflation and restore gross margins.
- Check fiscal 2022 growth against the $350 million expected sales reduction from the pork supply agreement and assess the effect on segment mix and profitability.
- Monitor Planters integration, realized earnings contribution, acquisition-related adjustments, and the significant goodwill and intangible asset balances recorded.
- Review debt repayment, interest expense, liquidity, and covenant headroom following the acquisition-driven increase in borrowings.
- Assess labor availability, supply-chain throughput, foodservice demand, and Jennie-O’s recovery from higher feed and logistics costs.
- Follow developments in the antitrust lawsuits and other legal, regulatory, and food-safety contingencies.