Hormel Foods Corporation — FY2019 Form 10-K
Business context and reporting period. Hormel produces and markets branded and unbranded meat and food products across Grocery Products, Refrigerated Foods, Jennie-O Turkey Store, and International & Other. The fiscal year ended October 27, 2019 and comprised 52 weeks; the filing also reports fourth-quarter results. Fiscal 2019 segment comparisons were recast for organizational changes. The company sold CytoSport, including Muscle Milk and Evolve, in April 2019 for $479.8 million.
Financial performance and position
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net sales | $9.497 billion | $9.546 billion |
| Gross profit / gross margin | $1.885 billion / 19.8% | $1.979 billion / 20.7% |
| Operating income | $1.196 billion | $1.180 billion |
| Pretax earnings | $1.210 billion | $1.181 billion |
| Net earnings attributable to Hormel | $978.8 million | $1.012 billion |
| Diluted EPS | $1.80 | $1.86 |
| Operating cash flow | $923.0 million | $1.242 billion |
| Capital expenditures | $293.8 million | $389.6 million |
| Cash and cash equivalents at year-end | $672.9 million | $459.1 million |
| Long-term debt | $250.0 million | $624.8 million |
FY2019 SG&A was $727.6 million, down from $841.2 million. The effective tax rate was 19.1%, versus 14.3% in FY2018. Total assets were $8.109 billion and shareholders’ investment was $5.921 billion at year-end. The company paid $437.1 million in dividends and repurchased $174.2 million of shares.
In Q4, sales were $2.502 billion, down 0.9%; net earnings attributable to Hormel were $255.5 million, down 2.3%, and diluted EPS was $0.47, versus $0.48. Q4 gross profit was $493.7 million, down 7.4%, with gross margin of 19.7%, compared with 21.1%.
Material changes versus the prior comparable period
- Reported FY sales declined 0.5%, principally because of the CytoSport divestiture; management reported organic sales growth of 1% excluding divestitures.
- Pretax earnings rose 2.4%, helped by value-added Refrigerated Foods growth, lower SG&A, and the CytoSport sale gain. Net earnings fell 3.3% and diluted EPS fell 3.2%, mainly reflecting the higher effective tax rate after FY2018’s tax-reform benefit.
- Gross margin fell 0.9 percentage point. Management cited weaker commodity profitability, Jennie-O sales mix, lower Skippy peanut-butter pricing, and higher raw-material and operating costs.
- Refrigerated Foods sales increased 2.0% and segment profit increased 1.6%. Grocery Products sales declined 4.5% and segment profit declined 3.9%; Jennie-O segment profit declined 10.5%; International & Other segment profit declined 15.1%.
- Operating cash flow decreased $318.7 million, primarily due to increased working capital and a higher tax rate. Cash from investing activities was $220.2 million, including CytoSport and Fremont facility sale proceeds. The Columbus-related $375.0 million term loan was repaid during the year.
Outlook, commentary, risks, and unusual items
- Management expected FY2020 sales and pretax profit growth, with branded, value-added products and Refrigerated Foods growth among the principal drivers. It expected Jennie-O to benefit from operational improvements, industry recovery, and regained lean ground turkey distribution.
- Management forecast a FY2020 effective tax rate of 20.5%–22.5% and capital expenditures of approximately $360 million. A $150 million Burke facility expansion was expected to open in Q3 FY2020. Project Orion, an Oracle Cloud transformation, was scheduled to begin phased implementation in FY2020.
- Management identified higher and volatile protein input costs, African swine fever, global trade uncertainty and tariffs, and foreign cost inflation as significant risks. Other disclosed risks include food safety and recalls, commodity availability and pricing, customer concentration, labor relations, litigation, regulation, supplier disruptions, cybersecurity, and execution of Project Orion.
- Walmart represented approximately 13.5% of FY2019 revenue. The five largest customers represented 45% of Grocery Products sales, 35% of Refrigerated Foods, 52% of Jennie-O, and 16% of International & Other.
- CytoSport’s sale generated a $16.5 million pretax gain and a stated $17.0 million tax benefit. The company recorded a $17.3 million CytoSport trademark impairment in FY2018; no goodwill impairment was recorded in FY2019. Certain indefinite-lived trade names with combined carrying value below $100 million had fair values less than 10% above carrying value, leaving potential future impairment exposure.
- Year-end liquidity included $672.9 million in cash and an undrawn $400 million revolving credit facility. The company reported compliance with debt covenants. Contractual cash obligations totaled $3.635 billion, largely purchase commitments for livestock and raw materials.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective. The auditor highlighted valuation of pension alternative investments and indefinite-lived trade names as critical audit matters.
Most important facts for investors to verify
- Whether FY2020 growth targets are achieved despite higher input costs, African swine fever exposure, and trade uncertainty.
- Whether Refrigerated Foods’ value-added growth can continue to offset weaker commodity profitability, and whether Jennie-O’s distribution and profitability recover.
- Cash conversion and working-capital trends following the FY2019 decline in operating cash flow.
- Progress and cost control for the Burke expansion and Project Orion, including the expected benefits and implementation risks.
- Performance of the trade names with limited fair-value headroom, and any resulting impairment charges.