Hormel Foods Corporation — Q2 FY2020 Form 10-Q
Reporting period: Thirteen weeks ended April 26, 2020; year-to-date figures cover the twenty-six weeks ended that date. Comparisons are with the periods ended April 28, 2019. Hormel makes and markets branded food products across Grocery Products, Refrigerated Foods, Jennie-O Turkey Store, and International & Other.
Financial performance
Amounts are in millions, except per-share data and percentages.
| Metric | Q2 FY2020 | Q2 FY2019 | Six months FY2020 | Six months FY2019 |
|---|---|---|---|---|
| Net sales | $2,422.5 | $2,344.7 | $4,806.9 | $4,705.1 |
| Gross profit / margin | $477.4 / 19.7% | $469.1 / 20.0% | $945.8 / 19.7% | $957.5 / 20.3% |
| Operating income | $293.5 | $312.4 | $573.9 | $618.6 |
| Net earnings attributable to Hormel | $227.7 | $282.4 | $470.6 | $523.9 |
| Diluted EPS | $0.42 | $0.52 | $0.86 | $0.96 |
| Operating cash flow | Not separately reported for quarter | Not separately reported for quarter | $548.3 | $365.6 |
- Q2 sales rose 3.3%; organic sales, excluding acquisitions and divestitures, increased 5.5%. Q2 pretax earnings declined 9.9% and diluted EPS declined 19.2% year over year. On the company’s non-GAAP adjusted basis, Q2 diluted EPS was $0.42 versus $0.46, excluding the prior-year CytoSport divestiture gain.
- For the first half, sales rose 2.2%, while pretax earnings fell 7.7% and diluted EPS fell 10.4%. Organic sales increased 4.7%.
- Q2 SG&A was $193.9 million, up 14.0%; equity earnings from affiliates were $10.0 million, down 24.6%. The effective tax rate was 20.6% for Q2 versus 11.1% a year earlier, largely reflecting prior-year tax benefits associated with CytoSport and equity compensation.
- Cash from operations increased 50% year over year for the first half, mainly from lower inventory and accounts receivable. Cash and equivalents were $606.1 million at April 26, 2020, versus $672.9 million at October 27, 2019.
- At April 26, current assets were $2,248.9 million and current liabilities were $1,324.6 million. Balance-sheet debt was $315.2 million, comprising $258.3 million current maturities and $56.9 million long-term debt; the filing says the company planned to seek debt-market opportunities to refinance debt maturing in April 2021. Debt covenants were in compliance.
- First-half investing cash outflow was $423.1 million, including the $268.9 million Sadler’s Smokehouse acquisition and $138.6 million of property and equipment purchases. Financing cash outflow was $188.7 million, including $236.8 million of dividends paid. Fiscal 2020 capital spending was estimated at approximately $340 million.
Material changes and operating context
- COVID-19 and shelter-in-place measures shifted demand from foodservice to retail. Q2 U.S. retail sales rose to $1,455.7 million from $1,255.5 million, while U.S. foodservice sales fell to $566.8 million from $716.4 million.
- Q2 segment profit increased 22.3% in Grocery Products, 54.1% in Jennie-O Turkey Store, and 61.7% in International & Other; Refrigerated Foods declined 16.9%. Grocery benefited from stronger branded retail demand and mix. Refrigerated Foods was hurt by weaker foodservice sales and increased operating costs.
- Q2 cost of products sold included approximately $20 million of higher COVID-related operating costs. The company expected another $60–$80 million of such costs in the second half, weighted mainly to Q3, with most expected to be temporary.
- Sadler’s Smokehouse was acquired on March 2, 2020, for a preliminary $268.9 million, funded with cash and included in Refrigerated Foods. Purchase-price allocation remained pending. In the prior-year quarter, Hormel sold CytoSport and recorded a $16.5 million pretax gain and a $17.0 million tax benefit.
Outlook, risks, and unusual items
- Management expected Q3 results to face operational interruptions, record-high input costs, lower foodservice demand, and higher COVID-related operating costs. Branded, value-added retail products were expected to offset some pressures. No full-year earnings or EPS guidance is stated in the provided filing text.
- COVID-19 risks included workforce illness or absenteeism, facility and supplier disruption, added safety costs, and continuing weakness in foodservice. The company described enhanced safety measures and more than $11 million in bonuses for plant production employees.
- Other risks include volatility and availability of meat, poultry, grain and other inputs; livestock disease; foreign-exchange movements; food safety and product liability; customer or supplier disruption; and acquisition integration. Management cautioned that evolving pandemic-related estimates could materially affect future periods.
- Investment losses contributed to the year-over-year earnings decline. Trading securities held in a rabbi trust recorded Q2 losses of $11.4 million, compared with gains of $4.8 million in the prior-year quarter; these securities’ mark-to-market changes affect earnings.
- Commodity hedges had $46.1 million of pretax losses in accumulated other comprehensive loss at quarter-end; the company expected to recognize most over the next twelve months. Legal proceedings were not expected to have a material effect, individually or in aggregate. The filing reported $24.0 million of unrecognized tax benefits, including interest and penalties.
Key facts for investors to verify
- Whether the expected $60–$80 million of second-half COVID-related costs and Q3 operational and input-cost pressures materialized.
- Whether retail demand can continue to offset reduced foodservice demand, particularly in Refrigerated Foods and Jennie-O Turkey Store.
- Sadler’s integration, final purchase-price allocation, and contribution to Refrigerated Foods results.
- Refinancing of debt maturing in April 2021, planned capital spending, and the effect on cash and liquidity.
- How commodity hedge losses, investment valuations, and foreign-exchange changes affect subsequent earnings and comprehensive income.
- Progress toward the approximately $340 million fiscal-year capital expenditure estimate and maintenance of debt-covenant compliance.