Hormel Foods Corporation — Q3 FY2023 10-Q
Reporting period: Quarter and nine months ended July 30, 2023; comparisons are with the periods ended July 31, 2022. Amounts are in U.S. dollars unless noted.
Financial performance
| Metric | Q3 FY2023 | Year-to-date FY2023 |
|---|---|---|
| Net sales | $2.963 billion, down 2.3% | $8.912 billion, down 2.9% |
| Volume | Up 1.9% | Down 5.4% |
| Gross profit / margin | $498.0 million / 16.8% (16.7% prior year) | $1.485 billion / 16.7% (17.4% prior year) |
| Operating income | $216.8 million, down 25.5% | $802.0 million, down 15.2% |
| Net earnings attributable to Hormel | $162.7 million, down 25.7% | $597.6 million, down 17.0% |
| Diluted EPS | $0.30, down 25.0%; adjusted $0.40, unchanged | $1.09, down 16.8%; adjusted $1.19, down 9.2% |
| Operating cash flow | Not separately reported | $728.8 million, down 4.5% |
| Capital expenditures | Not separately reported | $168.5 million |
Segments
- Retail: Q3 sales $1.892 billion, down 1.7%; segment profit $151.1 million, down 7.3%. Unfavorable mix and higher brand investment weighed on results.
- Foodservice: Q3 sales $890.9 million, down 2.9%; segment profit $146.3 million, up 13.6%, supported by volume and improved mix.
- International: Q3 sales $180.6 million, down 6.0%; segment profit $12.2 million, down 50.0%, amid weak China results, softer branded exports, and unfavorable pork and turkey markets.
Liquidity, debt, and capital allocation
- Cash and cash equivalents were $669.1 million at July 30, down from $982.1 million at October 30, 2022. The decline primarily reflected the $425.8 million purchase of a 30% interest in Indonesia’s Garudafood.
- Investing cash outflow was $588.5 million and financing cash outflow was $451.0 million for the nine months. Dividends paid were $442.6 million; share repurchases totaled $12.3 million.
- Carrying value of debt and other borrowing arrangements was $3.307 billion, including $947.0 million classified as current. The $950 million 0.650% notes due in 2024 were reclassified to current maturities.
- The company had no outstanding draws on its $750 million revolving credit facility and was in compliance with debt covenants. Management said operating cash flow, cash on hand, borrowing capacity, and capital-market access should cover commitments.
- The fiscal 2023 annual dividend rate increased to $1.10 per share. Estimated fiscal 2023 capital expenditures are $280 million.
Changes, outlook, and risks
- Quarterly GAAP earnings were materially affected by a $70 million accrual for an adverse arbitration ruling received August 15, after quarter-end. The amount is included in Q3 SG&A and accrued expenses; payment is expected in Q4. The ruling is not subject to further appeal or judicial review. Excluding it, adjusted Q3 EPS was $0.40, in line with the prior year.
- Management expects Q4 gross margin as a percentage of sales to be comparable with the prior year; Foodservice margin is expected to improve, while Retail and International margins are expected to decline. Q4 segment profit is expected to be lower for Retail, higher for Foodservice, and significantly lower for International.
- Fiscal 2023 effective tax rate is expected to be 21%–23%. Full-year advertising expense is expected to increase year over year.
- Management cited continued inflation and higher warehousing costs; protein input costs were expected to be lower than FY2022 for the rest of the year, while feed costs were expected to remain above historical levels. Q3 advertising investment was $43 million, up 15%.
- Year-to-date volume was affected by reduced pork availability under a new supply agreement and lower turkey supply due to highly pathogenic avian influenza. Other risks include softer consumer and foodservice demand, commodity volatility, China weakness, logistics disruption, and labor availability and costs. Contracts covering approximately 2,400 employees at four facilities were due to expire in FY2023, with negotiations ongoing.
- The company’s strategic operating model changed from four reportable segments to Retail, Foodservice, and International beginning in FY2023; comparative segment results were recast.
Important facts for investors to verify
- Confirm the Q4 cash payment and final accounting effects of the $70 million arbitration accrual.
- Track the refinancing or repayment plan for the $950 million notes due in 2024 and the company’s liquidity after the Garudafood investment.
- Assess whether volume, pricing, and margins recover, particularly in Retail and International, and whether Foodservice gains continue.
- Monitor pork and turkey supply, commodity and feed costs, China demand, consumer elasticity, and labor negotiations.
- Compare reported GAAP results with management’s adjusted non-GAAP measures; adjusted results exclude the arbitration ruling.