Hormel Foods Corporation — Form 10-Q Summary
Reporting period: Second quarter and six months ended April 30, 2017. Fiscal 2017 is a 52-week year; fiscal 2016 was a 53-week year, with the extra week in its fourth quarter. Financial statement amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $2,187.3 | $2,300.2 | $4,467.5 | $4,592.9 |
| Gross profit | $486.9 | $526.4 | $1,039.2 | $1,084.4 |
| Gross margin | 22.3% | 22.9% | 23.3% | 23.6% |
| Operating income | $316.0 | $323.8 | $671.4 | $683.4 |
| Net earnings attributable to Hormel | $210.9 | $215.4 | $446.1 | $450.5 |
| Diluted EPS | $0.39 | $0.40 | $0.83 | $0.83 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $261.2 | $409.1 |
| Capital expenditures | Not provided for quarter | Not provided for quarter | $77.0 | $99.9 |
Quarterly sales declined 4.9% and attributable earnings declined 2.1%; six-month sales fell 2.7% and attributable earnings fell 1.0%. Excluding the Justin’s acquisition and the DCB and Farmer John divestitures, management reported adjusted sales growth of 2.2% for Q2 and 2.8% year to date, with adjusted tonnage up 0.6% and 2.7%, respectively. These are non-GAAP comparisons.
SG&A decreased 14.3% in Q2 and 7.1% year to date, primarily reflecting reduced advertising and lower employee-related expenses. Equity earnings from affiliates increased 5.5% for Q2 and 11.2% year to date, supported by MegaMex brands.
Segments and material changes
- Grocery Products: Q2 sales rose 7.7% and segment profit 15.5%. Growth reflected Justin’s and stronger sales of products including Wholly Guacamole and SPAM.
- Refrigerated Foods: Q2 sales fell 5.9%, primarily due to Farmer John’s sale; segment profit was essentially flat. Value-added retail and foodservice products performed well.
- Jennie-O Turkey Store: Q2 sales fell 8.3% and segment profit fell 28.9%. Management cited lower turkey commodity prices, competitive pricing pressure and higher operating costs.
- Specialty Foods: Q2 sales fell 23.6% and segment profit fell 16.4%, mainly reflecting the DCB divestiture and lower contract manufacturing sales.
- International & Other: Q2 sales rose 19.0% and segment profit rose 37.7%, driven by pork and branded exports; shipment timing also shifted volume into the quarter.
Farmer John was sold on January 3, 2017, for $145 million cash, subject to final working-capital adjustments. Its assets had been reported in Refrigerated Foods; the company said the business was not material to annual sales, earnings or EPS. Justin’s was acquired in May 2016 for a final purchase price of $280.9 million and is included in Grocery Products.
Liquidity, debt and capital allocation
Cash and cash equivalents were $548.9 million at April 30, 2017, versus $415.1 million at October 30, 2016. Six-month operating cash flow was $261.2 million, down from $409.1 million, which management attributed to higher working capital. Investing activities provided $62.8 million, including $135.9 million of Farmer John sale proceeds; the prior-year period used $85.0 million. Financing activities used $186.5 million, including $166.5 million of dividends and $49.6 million of share repurchases.
Long-term debt, less current maturities, was $250.0 million at both April 30, 2017, and October 30, 2016. The filing reports no current debt balance on the balance sheet. Current liabilities were $824.6 million and current assets were $2,125.8 million at April 30. The company reported compliance with all debt covenants. The fiscal 2017 capital expenditure estimate was approximately $190 million, including projects in China and Minnesota, capacity expansions and food- and employee-safety investments. The annual dividend rate was increased to $0.68 per share.
Outlook, risks and contingencies
- Management expected a fiscal 2017 effective tax rate of 33.0%–33.5%; the six-month rate was 33.5%.
- Management anticipated continued growth in selected value-added products, Grocery Products momentum in the second half, growth in Muscle Milk, and strong branded exports. It expected turkey commodity conditions and competitive pricing to continue pressuring Jennie-O comparisons, and forecast China plant start-up costs to weigh on China business profit.
- Refrigerated Foods input costs were expected to generally trend above fiscal 2016 levels. Pork exports were expected to moderate from Q2 but remain above prior-year levels.
- Principal disclosed risks include food safety and product liability, livestock disease, volatile pork, poultry, grain and other input costs, competitive pricing and changing consumer demand, labor and supplier disruption, acquisition integration, regulation, litigation, foreign-market exposure and cybersecurity. Commodity hedges may be ineffective or limit benefits from favorable price movements.
- Unrecognized tax benefits, including interest and penalties, totaled $19.8 million; state tax audits remained ongoing, and the company could not reasonably estimate the effect of potential changes. Standby letters of credit totaled $48.7 million, including $4.0 million of revocable guarantees for an affiliate. Ordinary-course legal proceedings were not expected to have a material effect, individually or in aggregate.
Key investor verification points
- Check whether underlying growth persists after accounting for the Farmer John and DCB divestitures and Justin’s acquisition; assess the non-GAAP comparison methodology.
- Track Jennie-O’s commodity-market and competitive pressures, and whether value-added growth offsets them.
- Monitor working-capital movements and operating cash conversion, which weakened year over year despite higher reported cash.
- Evaluate delivery of the approximately $190 million capital-spending plan and expected benefits from the Jiaxing and Melrose projects.
- Review export trends, China start-up costs, tax-audit developments, and exposure to food safety, disease and commodity-price risks.